Improving On-Time Delivery Performance
Through the Implementation of Lean Supply Chain Management
by
Hiep The Nguyen
Bachelor of Science in Civil Engineering , Tufts University, 1999
Submitted to the Department of Civil and Environmental Engineering and the Sloan School of
Management in Partial Fulfillment of the Requirements for the Degrees of
Master of Science in Civil and Environmental Engineering
and
Master of Science in Management
in Conjunction with the Leaders for Manufacturing Program at the
Massachusetts Institute of Technology
June 2002
C 2002 Massachusetts Institute of Technology. All rights reserved
Signature of Author ..................
/4
Certified by..................................................
Certified by..........................
Sloan School of Management
Depa qitCivil and Envronmental Engineering
May 10, 2002
-................
Donald B. Rosenfield, Thesis Supervisor
Senior Lecturer, Sloan Sc
of Management
........
Executive )irector, Master o
Certified by.............................................
;Masters,
e
Thesis Supervisor
.n eering in Logistics Program
........................
David Simchi-Levi, Thesis Reader
Professor, Deioartmnent of Civil and Envirpnmental Engineering
Approved by .............................
-............
Margaret Andrews
Executive Director of Master's Program
Sloan School of Management
..... ..............
Approved by .................
MASSACHUSETTS INSTITUTE
.......
3 2002
LIBRARIES
.................................
Oral Buyukozturk
Chairman, Departmental Committee on Graduate Studies
Department of Civil and Environmental Engineering
UF TECHNOLOGY
JUN
..........
BARKER
Improving On-Time Delivery Performance
Through the Implementation of Lean Supply Chain Management
by
Hiep T. Nguyen
Submitted to the Department of Civil and Environmental Engineering and the Sloan School of Management
on May 10, 2002 in partial fulfillment of the requirements for the Masters of Science in Civil and Environmental
Engineering and the Masters of Science in Management
Abstract
Instron Corporation, a manufacturer of material testing equipment in Canton,
Massachusetts, has recognized a need to improve its on-time delivery performance and to reduce
costs in order to meet the increasing expectations of customers and to maintain its position as
market leader. Among many potential approaches, supply chain improvement has been
considered one of the most promising solutions. This thesis describes the efforts of a project
team led by the author to analyze the root causes of the delivery problems and examine the
effectiveness of a lean approach to supply chain management to improve the competitive
advantage of the company.
The project team conducted a thorough root cause analysis for the production and supply
chain problems using various management tools such as personal interviews, the Language
Processing (LP) method, and the Ishikawa approach. The team also performed a complete value
chain analysis and identified several opportunities for improvement. These findings were then
translated into a set of recommendations for inventory policy and supplier policy.
This thesis presents the concepts and methodology of a lean approach to supply chain
management, assesses Instron performance using lean perspectives, and suggests a roadmap for
lean transformation. While time constraints prevented a full implementation of this lean solution,
current business literature shows many companies have made significant improvements in
performance and profitability when implementing it.
The practical contribution of the internship project is the development of a material
replenishment model that helps the company pull parts effectively from its suppliers. The
implementation of this pilot model at the company's machine shop in Binghamton, New York
has been expected to increase part availability and machine utilization significantly, while
reducing inventory level. However, this pilot model represents only the first step in using lean
supply chain management to improve the service level and reduce waste. More importantly, the
thesis delivers a documented framework to achieve similar improvements for other Instron's
product lines.
Thesis Advisor: Donald B. Rosenfield
Title: Senior Lecturer, Sloan School of Management
Director, Leaders for Manufacturing Program
Thesis Advisor: James Masters
Title: Executive Director, Master of Engineering in Logistics Program
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3
Acknowledgments
While it is impossible for me to acknowledge everyone who has contributed to the
success of my internship and thesis, I will briefly mention those who had the greatest impact.
First, I would like to extend my gratitude to Instron Corporation for providing the forum
and support for this research. I would like to thank Bill Milliken, Vice President of
Manufacturing, for his kind sponsoring and leadership. Many special thanks go to Kerry Rosado,
Director of Electro-Mechanical Business Unit and my direct supervisor, and the project team,
which include Marc Montlack, Paul Meroski, Paul Carmichael, Kathy Minaya, and Mike Lee.
Their experience, insightfulness, and unselfish support enabled my progress during the
internship. I greatly appreciated Brad Munro, Vice President of Purchasing; Dave Fahy, former
Vice President of Quality; and Jud Broome, Director of Parts and Service, for their continuing
encouragement and support.
Next, I would like to acknowledge the support and resources made available to me
through the Leaders for Manufacturing (LFM) Program. I would like to thank everyone involved
in creating and running this unique program that has provided me with an incredible learning
experience in the past two years.
I would like to thank my thesis advisors, Don Rosenfield and James Masters, for their
guidance through the internship and thesis writing process. They greatly helped me to understand
the related theories and gave valuable advice for my research and thesis.
I would also like to take this opportunity to express my gratitude to my parents-in-law,
who have provided me with great encouragement and support for my academic endeavors.
Finally, I would like to dedicate this work to my wife, Lieu, and my two sons, Nguyen and Hoa,
for their understanding and sacrifice. Their unflagging love and caring make all of these efforts
worthwhile.
4
Table of Contents
Title Page
Abstract
Acknowledgements
Table of Contents
1
2
4
5
List of Figures
List of Tables
7
8
1. Chapter 1: Introduction
10
1.1. Introduction
1.2. An Overview of the Company
1.3. Thesis Scope and Objectives
10
10
13
1.4. Project Approach
15
1.5. Thesis Overview
2. Chapter 2: Knowledge Review
2.1. Lean Concepts
2.1.1. Overview of Lean Production System
2.1.2. The Five Lean Principles
16
18
18
18
19
2.1.3. The Seven Wastes
2.2. Value Stream Management
2.2.1. What is Value Stream Management?
19
20
20
2.2.2. Value Stream Mapping Tools
2.3. Supply Chain Management
2.3.1. What is Supply Chain Management?
2.3.2. Why Supply Chain Management?
2.3.3. Flows within Supply Chain
2.3.4. The Supply Chain Challenges
21
23
23
24
25
26
2.3.5. Key Issues in Supply Chain Management
2.4. Manufacturing Strategy and Delivery Lead Time
2.5. Manufacturing Strategy and Inventory Policy
27
27
29
3. Chapter 3: Identify the Problem
30
3.1. Personal Interviews
30
3.2. The Language Processing (LP) Method
3.3. Ishikawa Analysis (Cause and Effect Analysis)
4. Chapter 4: Instron Value Chain Analysis
4.1. Overview of Instron EM Supply Chain Model
32
35
37
37
4.2. Process Analysis
4.3. Understanding Demand and Customers
39
42
4.3.1. Demand Analysis Approach
42
4.3.2. Understanding Demand Patterns
4.3.3. Understanding Customers
4.4. Understanding Products and BOMs
43
45
46
4.4.1. Product Analysis Approach
4.4.2. BOM Analysis
46
47
5
5.
4.4.3. Distribution by Value Analysis (ABC Analysis)
48
4.4.4. Guidelines for the Control of Class A Items
4.4.5. Guidelines for the Control of Class B Items
4.4.6. Guidelines for the Control of Class C Items
50
50
50
4.5. Understanding Suppliers
4.5.1. Supply Base Analysis
4.5.2. Guidelines for Supplier Policy
51
51
53
Chapter 5: Lean Approach to Supply Chain Improvement
5.1. Overview
55
55
5.2. Lean Methodology
56
5.3. Assessment in Lean Perspective
59
5.4. Lean Roadmap
61
5.4.1.
5.4.2.
5.4.3.
5.4.4.
Lean Approach
Lean Approach
Lean Approach
Lean Approach
to
to
to
to
Customer Relationships
Product Development
Supply Chain Management
Order Fulfillment
66
66
6. Chapter 6: Pilot Replenishment Model
6.1. Capacity Model for Lot Sizes
7.
63
63
63
64
6.2. Inventory Review Frequency
72
6.3. Determining the Reorder Point (ROP)
73
6.4. Determining the Order Quantity
6.5. Examples of Calculation
Chapter 7: Results and Recommendations
7.1. Academic Results
7.2. Results at Instron
7.3. Recommendations
7.4. Conclusion
74
75
78
78
79
81
82
84
90
96
Appendix A
Appendix B
Bibliography
6
List of Figures
Figure 1.1. View of Instron's headquarter in Canton, MA
Figure 1.2. Today Instron is home of many testing systems
Figure 1.3. Instron's typical products
Figure 1.4. EM Single Column Model
Figure 1.5. EM Double Column Model
Figure 1.6. Project Approach
Figure 2.1. The Supply Chain System.
Figure 2.2. Flows within Supply Chain
Figure 2.3. Manufacturing Strategy and Lead Time
Figure 3.1. LP View of Late Delivery Problem
Figure 3.2. Fishbone Diagram of Late Delivery Problem
Figure 4.1. Instron EM Value System Diagram
Figure 4.2. Instron EM Supply Chain Process Cycles
Figure 4.3. Order Fulfillment Cycle
Figure 4.4. Procurement Cycle
Figure 4.5. Generalized Process View of an Organization
Figure 4.6. Overall evaluation of SCM effectiveness
Figure 4.7. Demand Analysis Approach
Figure 4.8. Aggregate demand for EM testing models
Figure 4.9. An Example of the Monthly Demand Pattern for an EM model
Figure 4.10. Approach for BOM Analysis
Figure 4.11. Results of BOM Analysis for EM testing systems
Figure 4.12. Distribution of Value by SKUs for EM testing systems
Figure 4.13. Instron EM Supply Base Analysis
Figure 4.14. Distribution of Cost Volume by Geographical Regions
Figure 4.15. Distribution of Annual Cost Volume by Suppliers
Figure 5.1. Lean Approach to Supply Chain Improvement
Figure 5.2. Organization Structure for Lean Transformation
Figure 5.3. Instron EM Lean Assessment Graph
Figure 5.4. Lean Roadmap for Instron
Figure 6.1. Cost Trade-offs in Economic Order Quantity
Figure 6.2. (s, S) policy with multiple order opportunities
Figure A.1. Simplified LP Analysis of Instron EM Delivery Problem
Figure B.1. Simplified Fishbone Diagram
Figure B.2. Details of Process Analysis
Figure B.3. Details of Materials Analysis
Figure B.4. Details of Work Force Analysis
Figure B.5. Details of Equipment Analysis
Figure B.6. Details of Design Development Analysis
7
11
12
13
14
14
15
24
26
28
34
36
38
39
40
40
41
42
43
44
45
47
48
48
51
52
53
57
58
60
62
68
73
84
90
91
92
93
94
95
List of Tables
Table 2.1. The Seven Value Stream Mapping Tools
21
Table 4.1. Result Matrix of BOM Analysis
49
Table 6.1. Part Lot Sizes based on Capacity Model
Table 6.2. Part Lot Sizes with Reduced Setup Times
71
72
Table 6.3. Monthly Demand of Part X
75
Table 6.4. Inventory Parameters for Part X
Table 7.1. Benefits of the Pilot Project for Instron Machine Shop
76
81
8
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9
i.
INTRODUCTION
1.1 Introduction
In the fierce competition of today's global market, many companies are facing numerous
challenges in meeting the heightened expectations of customers and maintaining a profitable
operation. Inspired by the great success of Japanese manufacturers in the 80's, strategies such as
lean manufacturing, just-in-time strategy, total quality management, and "kanban" have become
very popular in many companies in the United States and other parts of the world. However, in
the last few years, these companies have made almost all possible reductions in manufacturing
costs using these approaches. Looking for further opportunities to reduce costs while still
maintaining satisfactory service levels, they have discovered that effective supply chain
management is the source of additional improvements.
Instron Corporation in Canton, Massachusetts is one of those companies. It recognized
the need to improve its on-time delivery performance and reduce costs in order to maintain its
position as market leader. Among many potential approaches, supply chain improvement was
considered the most promising solution. The research supporting this thesis was conducted at
Instron Corporation in 2001, from June through December, to explore the effectiveness of lean
supply chain management for improving the competitive advantage of a manufacturing business.
1.2 An Overview of the Company
In 1946, two researchers from MIT, Mr. Harold Hindman and Mr. George Burr, founded
Instron Corporation in response to a growing demand for their materials testing systems, which
were developed from the technology of their original experimental product, a tensile tester for
the textile industry. Instron quickly grew and became the world's leading manufacturer and
10
supplier of materials testing equipment, software, and accessories' that are used to evaluate the
mechanical properties and performance of various materials, components, and structures. Instron
systems are used to test materials such as metals, plastics, composites, textiles, ceramics, rubber,
biomedical products, foods, fruits, and adhesives in research laboratories and on production
lines, in quality control and also in education. The company's mission is "to lead in advancing
material and component testing techniques by supplying instrumentation, support services and
expertise for testing products, structures and materials."2
Figure 1.1. View of Instron's headquarters in Canton, MA
Instron Corporation has been a stable and profitable company with annual sales in excess
of $150 million. Since 1999, it has been a private company after the retirement of its founder,
Mr. Harold Hindman. Currently, Instron has sales and service offices in more than 17 countries
and has over 1000 employees worldwide. Instron has two major manufacturing sites, one in
Canton, Massachusetts, and one in High Wycombe, England. With more than 50 years of
evolution, Instron has further expanded its product lines from the primary Electro-Mechanical
Alvarez, Maria J., "Analysis of the Accessory Business: Focus on EletroMechanical Grips," Master's Degree
Thesis, MIT Leaders for Manufacturing Program, May 1999.
2 Excerpt from Instron's Website: <http://www.instron.com/world/profile.asp>
11
(EM) tensile testing machines to a complete line of testing systems and support services. It has
achieved this growth through both R&D and the acquisition of smaller testing equipment
companies. Some of these acquisitions were direct competitors; others produced equipment that
complemented Instron's core product offerings. The nature of Instron's business is that of lowvolume, broad product line, and highly customer-driven configurations. These are very critical
factors that must be taken into consideration for any intended analysis or implementation.
WOLPERT
"Spring & Hardness"
E
"Durometers"
Wrigyg*
"Hardness"
"Instrumented Impact"
INSTRON
INSTRN SCHENCK
"Material Test Systems"YTEM
"Structural Test Systems"
SATEC
Figure 1.2. Today Instron is home for many testing systems
To maintain its competitive advantage, Instron's management has recently created
Centers of Excellence' (COE) to improve its responsiveness to market demand. The goal of
COE is to consolidate the assembly of each product family to one of Instron's worldwide
locations. Hence, if a product is produced in a COE, that center is responsible for supplying the
respective demand worldwide. Instron's plant in Canton, Massachusetts, has been designated as
the COE for EM and Hardness testing systems, and reengineered to be able to provide quick and
accurate responses to the respective product orders from all over the world.
Caterino, Garret J., "Implementation of Lean Manufacturing in a Low-Volume Production Environment," Master's
Degree Thesis, MIT Leaders for Manufacturing Program, June 2001.
12
Figure 1.3. Instron's typical products
1.3 Thesis Scope and Objectives:
Instron has had difficulty in maintaining a satisfactory on-time delivery performance for
years. Measured against its promised dates, the average fill rate at the EM Business Unit was
just about 80 percent. Due to the emergence of fierce competition, this problem has become one
of the major obstacles that the company needs to overcome to protect its leading position in the
materials testing equipment market.
The internship project focused on one of Instron's core product categories: the EM
frames (single-column and dual-column) that are used for tensile and compression testing. These
frames form the foundation for complete testing systems, to which material gripping devices and
accessories are added to create total system solutions for the material testing needs of customers.
13
These frames are the company's highest profit-generating items, which, with efficient and timely
manufacturing output, can contribute positively to the company's revenue and profit.
Figure 1.4. EM Single Column Model
Figure 1.5. EM Double Column Model
The research project and this thesis provide an extensive root cause analysis for the
problem and the development of sustainable solutions using lean supply chain approaches. The
focus of the project was to develop a set of recommendations on lean supply chain strategy and a
flexible material replenishment model that can help Instron work more effectively with its
suppliers to improve the delivery performance of Instron's EM core products. The pilot model,
which has been implemented for Instron's machine shop at Binghamton, New York, was
expected to significantly eliminate the potential stock-out of parts while reducing inventory
levels, which would result in better responsiveness and lower costs for final products. The
application of similar implementations at most, if not all, critical suppliers was recommended.
14
1.4 Project Approach
The project was conducted following the procedure shown in Figure 1.6. below:
1. Identify the Problem
2. Understand the
Problem
3. Generate Ideas to
Solve the Problem
4. Experiment and
Implement Solution
5. Evaluate and Plan for
Future Improvements
Figure 1.6. Project Approach
Many management and planning tools such as interviews, the language processing (LP)
method, the Ishikawa (cause-and-effect) analysis, and process flow diagram were also used in
this project in order to fully understand the investigated problem and explore most applicable
solutions. A more detailed procedure is described as follows:
1.
Identify the problem: Conduct the root cause analysis for current production and supply
chain problems using personal interviews, language processing (LP) method, and
Ishikawa analysis. Define project scope and specify detailed goals and metrics.
2.
Understand the problem: Collect and analyze data. Review and evaluate the current
supply chain process focusing on standardization, visibility, timeliness, and control.
Identify opportunities for improvement using process flow diagram, and other tools.
15
3.
Generate Ideas to Solve the Problem: Research supply chain models and develop
strategic supply chain solutions using a lean approach.
4. Experiment and Implement Solution: Develop and implement a pilot replenishment
model for supplying parts between the machine shop in Binghamton and the final
assembly line in Canton through a systematic approach based on the principles of the
Deming wheel: plan, do, check, act.
5.
Evaluate and Plan for Future Improvements: Evaluate results, adjust model, and expand
the implementation to other product lines. Make recommendations for future
improvements.
1.5 Thesis Overview
The thesis consists of seven chapters and three appendices with the contents summarized
as follows:
*
Chapter 1 provides an overview of the company, the thesis scope and objectives, and
project approach. Instron and its products are then briefly described to familiarize
readers with a basic background for better understanding discussions in following
chapters.
*
Chapter 2 provides a brief knowledge review of the concepts and principles of lean
thinking, supply chain management, and some related issues.
*
Chapter 3 presents the tools, processes, and results of problem identification. Various
management tools are described including interviewing, the LP method, and the Ishikawa
analysis. Discussions on the obtained results are also provided.
"
Chapter 4 analyzes Instron's value system that includes customers, products, and
suppliers. Several recommendations are also made along with the analysis.
"
Chapter 5 outlines the process of implementing lean approach in supply chain
improvements. This chapter includes the assessment of Instron operations in lean
perspectives and a lean roadmap for future improvement.
"
Chapter 6 presents the development and implementation of a pilot materials
replenishment model at the machine shop in Binghamton, New York. The capacity
model is briefly described and the formula to calculate the reorder point and order-up-tolevel quantities are also presented.
16
"
Chapter 7 summarizes the results of the project for both academia as well as for the
company. Further recommendations are also included.
*
Appendix A presents the detailed LP diagram.
" Appendix B displays the complete fishbone diagram.
All volume data in this thesis is disguised to protect Instron's competitive information.
17
2.
KNOWLEDGE REVIEW
This chapter provides a review of some necessary knowledge that was used in the
internship project, as well as in this thesis, and presents a summary of lean production systems, a
brief history of lean thinking evolution, the five lean principles, and the definition of the seven
wastes. The chapter then provides a brief summary of value stream management and value
stream mapping tools. The rest focuses on supply chain management issues and their
interactions with a manufacturing strategy.
2.1
Lean Concepts
2.1.1
Overview of Lean Production Systems
The term "lean production system" was used in the well-known books The Machine That
Changed the World (Womack et al., 1990) and Lean Thinking (Womack and Jones, 1996) to
describe the production approach of the Toyota Corporation, a world-class automotive
manufacturer. By using the term "lean" (a term coined by the researcher John Krafcik) in "lean
production systems," Womack and Jones wanted to make a clear distinction between the
approach of the Toyota Production System (TPS) from that of the mass production systems of
European or American companies. Many people today have to agree that TPS is an outstanding,
proven production system that efficiently uses far fewer resources to produce faster, better, and
more flexible products than the Western mass production systems.
The lean production system was created in Japan in response to its depleted resources
after the country's surrender in World War II. The financial and economic hardship at that time
did not allow Japanese automotive manufacturers to pursue the same path as Western
automakers. Taiichi Ohno (1912-1990), Toyota's then-chief process engineer, patiently
designed and developed a production system that most efficiently utilized its limited resources,
yet fulfilled market demand with quality products. He demonstrated that "a systematic attack on
18
waste would also provide a systemic attack on poor performance within manufacturing and
supply systems."' Ohno's lean production system not only helped Toyota survive during that
tough time, but also brought the company up to the level of one of the most respectable worldclass manufacturers. Today, the Toyota lean production system has become one of the ideal
production systems that numerous manufacturers have contemplated and tried to replicate.
2.1.2
The Five Lean Principles
Most simply, the core concepts of lean manufacturing are about adding value and
removing waste. In the widely acclaimed book, Lean Thinking, Womack and Jones crystallized
the essence of the lean revolution into the five principles fundamental to the elimination of
waste:
-
VALUE: Specify what does and does not create value from the customer's perspective.
-
VALUE STREAM: Identify and line up all value-creating actions in the best sequence.
-
FLOW: Make these value-creating actions flow without interruption, detours, backflows,
waiting or scrap.
-
PULL: Only make what is ordered or requested by the customer.
-
PERFECTION: Strive for perfection by continuing to remove discovered wastes 2 .
2.1.3
The Seven Wastes
Taiichi Ohno listed seven types of wastes that should be removed to make production
systems lean:
1.
OVERPRODUCTION - is the making of too much too early, or just in case, which is
regarded as the most serious waste, as it disrupts the smooth flow of goods and
services and reduces productivity and quality.
2. WAITING - occurs when time is not being used effectively, when goods are not
moving or having value added; or when workers have to spend time waiting for
available machines or parts.
Taylor, David and David Brunt, Manufacturing Operations and Supply Chain Management, London, England:
Thomson Learning, 2001, page 227.
2 Ibid, page 226.
19
3.
TRANSPORT - involves goods being moved within or outside of the factory.
Movements in the factory should be minimized as non-value addition.
4. INAPPROPRIATE PROCESSING - involves when overly complex equipment or
solutions, resulting in unnecessary steps, excessive transport, poor communication, or
low quality products.
5. UNNECESSARY INVENTORY - ties up capital and space, increases costs, and
prevents identification of problems.
6. UNNECESSARY MOTIONS - include unnecessary robotic machines' and workers'
movements, which lead to low productivity and poor quality.
7. DEFECTS - affect the bottom line of the company as they are direct costs.
Preventing defects by making quality products is more cost-effective than fixing or
discarding defective products.
Although Ohno originally developed this work within a manufacturing context, the
wastes are equally relevant across other activities in the supply chain.
2.2
Value Stream Management
2.2.1
What is the Value Stream Management?
A group of researchers in the United Kingdom defines Value Stream Management as
follows: "Value Stream Management is a strategic and operational approach to the data capture,
analysis, planning and implementation of effective change within the core cross-functional or
cross-company processes required to achieve a truly lean enterprise."' This method basically
applies lean principles within the value stream in a systematic approach that utilizes education,
policies, and selected mapping tools to diagnose, identify, and eliminate wastes within the
company or the supply chain.
Taylor, David and David Brunt, Manufacturing Operations and Supply Chain Management, London, England:
Thomson Learning, 2001, page 44.
20
2.2.2
Value Stream Mapping Tools
There are many ways to map a value stream in order to capture the process and identify
the potential problems or hidden wastes. Seven such mapping tools are widely used to achieve
the indicated purposes. In general, value stream managers employed from three to six mapping
tools to map a value stream. In order to achieve better results, one should understand the nature
of particular wastes targeted as well as the usefulness of each mapping tool before any mapping
activities take place. Table 2.1. below will show readers the effectiveness of the seven mapping
tools in correlation with Ohno's seven wastes.'
MAPPING TOOLS
Wastes
Process
Supply
Production
Quality
Demand
Decision
Physical
Activity
Chain
Variety
Filter
Amplification
Point
Structure
Mapping
Response
Funnel
Mapping
Mapping
Analysis
Mapping
Matrix
Overproduction
L
M
Waiting
H
H
Transport
H
L
L
M
M
M
M
L
L
Inappropriate
Processing
M
M
L
Inappropriate
Inventory
H
M
H
M
L
H
M
H
Unnecessary
Motion
H
Defects
L
Overall Structures
L
L
H
L
M
L
Table 2.1. The Seven Value Stream Mapping Tools
Taylor, David and David Brunt, Manufacturing Operations and Supply Chain Management London, England:
Thomson Learning, 2001, page 31.
21
Notes:
H
= High correlation and usefulness
M
= Medium correlation and usefulness
L
= Low correlation and usefulness
Below are brief descriptions of what these mapping tools can achieve, based on the paper
"The Seven Value Stream Mapping Tools" of Peter Hines and Nick Rich'. More details about
these tools may be found in the reference. 2
"
Process Activity Mapping: Process activity mapping, originated in industrial
engineering, consists of five stages: study the process flow, identify waste, consider
alternative arrangement for more efficient process sequence, consider changes for a
better flow pattern, consider each stage for necessity and improvement. This mapping
method involves simple steps such as detailing all process steps, categorizing their
activity type, and recording distance moved, time taken, and number of people
involved in each step. Next steps are further analyzing and improving by eliminating
unnecessary activities, simplifying steps, rearranging processes that reduce waste.
*
Supply Chain Response Matrix: This mapping approach provides a visual image of
the time compression and logistics movement for a particular process. Parameters are
usually mapped are critical cumulative lead time, cumulative days of inventory,
and/or total process time.
*
Production Variety Funnel: The production variety funnel provides an overview of
how the company or the supply chain operates. This method helps mapper make
decision on process changes to inventory reduction.
*
Quality Filter Mapping: This tool helps to identify where quality problems (product
defects, service defects, or internal scraps) are occurring, thus provide opportunity for
subsequent improvement actions.
*
Demand Amplication Mapping: This approach originates in Forrester's work on
systems dynamics. It can be used to show how delay of information and materials
flows affects demand variation.
Taylor, David and David Brunt, Manufacturing Operations and Supply Chain Management London, England:
Thomson Learning, 2001, page 27-43.
2 Ibid.
22
*
Decision Point Analysis: This approach helps to identify the decision points in the
supply chain for push-pull decisions.
*
Physical Structure Mapping: This new mapping tool is useful in providing an
visual overview of a particular supply chain at an industry level. This approach may
help to redesign supply chain structure in order to reduce waste and create value.
2.3
Supply Chain Management
Supply chain and supply chain management have become "buzzwords" in today's
business environment. However, many executives and managers have different definitions of
their true meaning and benefits. These unaligned perceptions have caused numerous
misunderstandings and have resulted in a lack of commitment from management for supply
chain improvement projects. There is an urgent need for many companies to educate executives
and employees alike about the scope of supply chain management, its objectives, and the values
that it can add to the company and other supply chain partners.
2.3.1
What is Supply Chain Management?
The supply chain encompasses "the set of facilities, equipment, people, and operating
policies that make possible the flow of goods from acquisition of raw material through
production and distribution into the hand of the customer.", Simply put, the supply chain
involves the flow of moving things from raw materials to end-users; supply chain management is
the management of the flow.
Dr. David Simchi-Levi, an MIT professor in logistics and supply chain, defines supply
chain management as follows:
Supply chain management is a set of approaches utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that merchandise is produced and distributed at
the right quantities, to the right locations, and at the right time, in order to minimize
system-wide costs while satisfying service level requirements2 .
' Shapiro, Roy D. and James L. Heskett, Logistics Strategy South-Western College Publishing, Cincinnati, Ohio,
1998, page 1.
2 Simchi-Levi, David et al., Designing and Managing the Supply Chain:
Concepts, Strategies, and Case Studies
New York, NY: The McGraw-Hill, Inc., 2000, page 1.
23
Simchi-Levi emphasizes the utilization of a system approach, which "encompasses the
firm's activities at many levels, from the strategic level through tactical to operational level," to
"minimize systemwide costs"' while ensuring time, place, and quantity utility.
Figure 2.1. provides readers with a good overview of the supply chain flow and its
components.
Supply System
(Inbound Logistics)
Raw
Material
Source
Operation System
Distribution System
(In-plant Logistics)
(Outbound Logistics)
Raw
Material
Storage
Mfg Plant
Physical Supply
Warehouse
Consumer
Physical Distribution
Marketing Logistics
Material Management
Supply Chain Management
Figure 2.1. The Supply Chain System.
Source: Roy, Shapiro and James Heskett, Logistics Strategy, page 3.
2.3.2
Why Supply Chain Management?
The objective of supply chain management is to maximize the total value generated by
efficiently managing flows between and among stages in a supply chain in order to optimize
Simchi-Levi, David et al., Designing and Managing the Supply Chain, New York, NY: The McGraw-Hill, Inc.,
2000, page 2.
24
customer service, to minimize the systemwide cost of supply chain operations, and to maximize
the flexibility of the supply chain.
According to Roy Shapiro and James Heskett in Logistics Strategy (1998), the ultimate
goal of a supply chain manager is to guarantee the availability:
-
of the right product,
-
in the right quantity,
-
and the right condition,
-
at the right place,
-
at the right time,
-
for the right customer,
-
at the right cost.
Studies show that in the 90's, American companies spent more than $700 billion annually
on supply-related activities, which unfortunately included many unnecessary expenses due to
inefficient management or bad practices in the supply chain'. Many companies have been
discovering that effective supply chain management would help them to improve their
competitive advantages and profitability.
2.3.3
Flows within the Supply Chain
As I mentioned in its definition, a supply chain can be considered as a system of flows:
information, material, product, and financial. The information and financial flows will move
from upstream to downstream, whereas the material and product flows will go the opposite
direction. The design and management of flows within the supply chain is very important, as
they will dictate the failure or success of the firm. A stop or problem that occurs in any flow
would definitely make other flows impossible and eventually cause havoc and damage to the
firm. Figure 2.2. below gives readers an overview of the four main flows that need to be handled
properly in the supply chain context.
' Simchi-Levi, David et al., page 5.
25
Functions
Information & Financial
Flows
Product & Material
Fnwr
Forecasting
Order Processing
Finished product transport, warehouse to customer
Finished product inventory control
Distribution center warehousing
Transportation from plant to distribution center
Packaging
Production planning
Plant storage
Production material control
Raw material storage
Raw material transportation
Raw material inventory control
Procurement
Figure 2.2. Flows within Supply Chain
Source: Roy, Shapiro and James Heskett, Logistics Strategy, page7.
2.3.4
The Supply Chain Challenges
Many companies know that effective supply chain management will significantly boost
their performance, and thus increase their bottom line and market share. However, there are also
many challenges in supply chain management. Below are listed the most commonly perceived
ones:
1.
The supply chain network is usually very complex. Supply chain partners most often
have different goals and incentives; therefore, it is difficult to find the best supply chain
solution for a company that can also satisfy all other partners' interests.
26
2.
It is always a big challenge to match supply with demand, as "demand forecast is always
wrong" as people say. Companies cannot avoid the risk of either investing in inventory
or losing sales due to stock-outs.
3.
Business parameters change over time; therefore, it is a big challenge to establish a
supply chain management that can be effective and agile all the time.
4. New supply chain problems emerge every day with new products, new industries, and
new customers. Without historical data or experience for all these recent parameters, it is
significantly difficult for supply chain managers to predict and solve these problems
effectively.'
2.3.5
Key Issues in Supply Chain Management
In order to develop and sustain effective supply chain systems, today's executives and
managers need to think over and find suitable solutions for some key issues on the strategic,
tactical, and operational levels:
2.4
-
Customer Value
-
Product Design
-
Inventory Control
-
Supply Chain Integration and Strategic Partnering
-
Distribution Network Configuration
-
Distribution Strategies
-
Information Technology and Decision-Support Systems2
Manufacturing Strategy and Delivery Lead Time
Suppliers and customers may define delivery lead time differently. "From the supplier's
perspective," delivery lead time is "the time from the receipt of an order to the delivery of the
product. From the customer's perspective, it may also include time for the order preparation and
transmittal." 3 Usually, most customers want to receive their orders in the shortest possible
1Simchi-Levi, David et al., Designing and Managing the Supply Chair' New York, NY: The McGraw-Hill, Inc.,
2000, page 7-8.
2 Ibid, page
9.
3 Arnold, J. R. Tony, Introduction to Materials Management 3rd ed., Upper Saddle River, NJ: Prentice-Hall, Inc.,
1998, page 3.
27
delivery lead time; thus, order winners are those who design a good manufacturing strategy that
can meet or exceed customers' expectations.
Figure 2.3. below shows the four basic strategies, which include engineer-to-order, maketo-order, assemble-to-order, and make-to-stock strategy, and their influence on the delivery lead
time':
Delivery
DESIGN
PURCHASE
Lead Time
MANUFACTURE
ASSEMBLE
SHIP
ENGINEERTO-ORDER
Delivery Lead Time
INVENTORY
MANUFACTURE
I ASSEMBLE
SHIP
RKE-TO-
ORDER
DeliveryLeadRTim
Delivery Lead Time
MANUFACTURE
I
ASSEMBLE
ThTrnLTw',~
IINVENTORY
1
SHIP
SHIP
MAKE-TO-
TOCK
Figure 2.3. Manufacturing Strategy and Lead Time
Among these four strategies, make-to-stock has the shortest delivery lead time, but
inventory levels may be high with finished goods. On the contrary, engineer-to-order has the
longest delivery lead time due to time spent on unique product design, inventory long lead time,
and custom manufacturing. Instron's current manufacturing strategies can be identified as
engineer-to-order (commonly named as "one shot" in the company) and assemble-to-order
production processes.
Arnold, J. R. Tony, Introduction to Materials Management. 3rd ed., Upper Saddle River, NJ: Prentice-Hall, Inc.,
1998, page 4.
28
2.5
Manufacturing Strategy and Inventory Policy
A chosen manufacturing strategy strongly influences the inventory policy that a company
needs to pursue. Within the company, the manufacturing process (engineer-to-order, make-toorder, assemble-to-order, and make-to-stock), the assembly methods (manual or automated
processes), and process metrics are critical factors for inventory policy selection decisions.
Moreover, an inventory policy also has an effect beyond internal company boundaries.' How a
company controls its inventory has a significant impact on the customer service level, vendor
relationships, and supply chain systemwide cost.
As mentioned above, Instron has traditionally been an assemble-to-order manufacturer.
It carries purchased parts and internally machined parts in inventory. Because demand for
Instron products is cyclical, the control of inventory levels to provide adequate amounts with no
excess is a dynamic issue that requires active control.
Usually, inventory turns are an important metric in inventory policy, as increasing
inventory turns generate larger cash flow. However, there is always a trade-off in this incentive.
Striving for higher inventory turns by keeping low inventory, managers have to ensure that the
set minimum inventory level is adequate for manufacturing demand, otherwise this effort may
lead to production problems. Besides, coordination with suppliers is a "must," as they have their
own limitation of capacities and commitments that they need to adjust to comply with demand
changes. Problems usually arise when the desired metric is not well aligned with other company
metrics nor with the cyclical nature of the inventory demands. Consequently, materials or parts
do not come as desired. Then, material stock-outs occur since the safety stock may be
inadequate to cover a longer lead time, forcing panic orders, costly actions, and resultant chaos.
These stock-outs then lead to missed shipments and lost revenues.
1Caterino, Garret J., "Implementation of Lean Manufacturing in a Low-Volume Production Environment," Master's
Degree Thesis, MIT Leaders for Manufacturing Program, June 2001.
29
IDENTIFY THE PROBLEM
My internship project began with a focused effort to identify the core problem for EM
supply chain management. This chapter summarizes the actions taken to unveil the root cause of
the investigated delivery performance problem for Instron's Electro-Mechanical Business Units.
The project team used various managing and planning tools to uncover this underlying issue.
The findings of these analyses are included and discussed in this chapter.
3.1
Personal Interviews
When I started the project at Instron in June, 2001, I conducted a 360-degree interview
to familiarize myself with the organization and also obtain some initial information on the
delivery problem in the Electro-Mechanical Business Unit. I believed that this would be the
fastest way to capture the essence of the problem by mapping and finding the similarities in the
perceptions of different people or departments on the same issue. I conducted numerous
interviews with executives and managers responsible for sales, quality, procurement,
manufacturing, marketing, forecasting, machine shop, and planning. In addition, I interviewed
engineers, technicians, workers, and team leaders working in various functions of the EM
business unit, such as assembly, stock room, packing, and testing units.
While the comapny met its financial goal in 2000, there were a few negative themes that
emerged from the interviews. The first theme was the concern about the repeated capacity gap
created by the "hockey stick" phenomenon that was driven by the financial policies of the
company. Business unit performance has been measured based on the achievement of the
quarterly financial target. Thus, toward the end of every quarter or year, every business unit tries
30
to surpass the financial goal. However, due to the difficulty in adjusting planned capacity and
long lead times of supplied parts, which are usually weeks or months, the manufacturing
business unit has had a difficult time keeping up with the quarter-end or year-end demand
generated by the sales department.
Another theme was the efficiency of the current supply chain management at Instron.
Some managers brought up concerns about the obsolescence and rigidity of some management
policies and procedures that no longer matched the current conditions of the constantly changing
market demand. A manager pointed out, "Lot sizing was defined several years ago in a different
market and needs to be reviewed and adjusted for today's sales forecasts." Another manager
commented, "Improper lot sizes and reorder points lead to stock out conditions," and "Reorder
points do not incorporate proper supplier lead times." Another manager added, "We have low
inventory turns. Another aspect of the inventory problem is the mismatch between inventory and
demand." Therefore, these managers thought that the company must quickly review, evaluate,
and improve the current supply chain management in order to better respond to market demand.
Coordination across business units or sites was also a problem. "We have a bad
reputation for lacking urgency.The problem is particularly acute when needing to operate crosssite," another manager admitted. "We lack consistency of process across business units,
especially when dealing with internal and external suppliers," a manager observed. An aligned
vision and commitment were critical across business units, as the unbalanced effort might
jeopardize the expected outcomes. More commitment, responsibility, and discipline were
considered as important aspects of the solution.
The last major theme was the need for attention and support from the executives. A
manager said, "When we make on-time delivery a top priority, we always see an improvement.
Once we begin paying less attention to it, performance always drops." With limits on financial
and supervisory resources, managers have been too busy to manage every necessary aspect of the
production and supply chain. They had to pick the "first things first" approach, which was what
the "boss" chose to focus on at the moment.
In addition, the recent restructuring created organizational changes in which people did
not know whom to address for help with problems. Workers and staff had to wait long hours
1What I imply by a "360-dergree interview" is that I interviewed not only the department directly involved in the
investigated problem, but also other departments in the company to get their opinions or comments on the same
issue. This method usually provides a more complete picture of the problem and reduces subjectivity.
31
before emerging needs were satisfied, which consequently caused chains of delay and
jeopardized delivery performance. Also, a manager mentioned that there were some "material
shortages due to quality issues...or due to unexpected incoming order product mix."
3.2
M
The Language Processing@ (LPT
) Method
To obtain some initial insight into the key variables of this investigation, I chose to use
the Language Processing®
(LPTM)
Method. The LP method is best known as a powerful tool for
analyzing a complex situation.1 Professor Shoji Shiba has been teaching this method in his Total
Quality Management (15. 766) and Breakthrough Management (15.097) courses at the MIT
Sloan School of Management for many years.
Following the method, I conducted this analysis with my project team, a cross-functional
team of six people, which was formed to ensure that the project would achieve targeted
objectives and benefit the company. I served as a team facilitator, while the other members
came from different business units in the company, such as planning, manufacturing, purchasing,
quality, and machine shop. Based on the ideas that I filtered from the 360-degree interviews, the
theme was posed as a question: "What were the most critical factors that have prevented the
company from achieving 95 percent of on-time delivery performance for Electro-Mechanical
products?" I then asked all the team members to provide at least five of the most relevant and
concise answers when responding to the question. With the received feedback from the project
team members and verbatim quotes related to the theme selected from the 360-degree interviews,
I conducted the analysis process by going step-by-step through the 19 steps of the LP method.
First, I wrote all quotes on index cards, then "scrubbed" them (i.e., the quotes were semantically
reviewed, edited, and rewritten until their meanings were clear symbolic facts). Next, I grouped
them in first-level groups of two or three quotes based on similar "images"2 and created a new
headtitle that summarized the meaning content of each group. I then iterated the process to form
second-level and third-level groups until there were five or fewer groups that represented the
most important factors of the analyzed problem. After that, I ranked these groups based on the
Shiba, Shoji and David Walden, Four Practical Revolutions in management. Cambridge, MA: Center for Quality
Management, 2001, page 215-219.
2 Grouping fact based on similar "image" is one of the most interesting and unique features of the LP method.
Participant intuitively creates a mental image for each card conveying the the essence of the meaning rather than
from the words themselves. Then, they group two or three cards that have similar image.
32
level of importance of those factors to the theme. I then constructed the concluding statement
based on the resulting final diagram.I
See Appendix C for the complete LP diagram. A simplified version is presented below to
show the outcome. There were four main factors identified: "Management's Limits," "Work
Condition Issues," "Financial Drive," and "Material Handling Issues." Contrary to the common
perception in the company, the "Material Handling Issues" are not viewed as the root cause for
the late delivery performance, but they are viewed as the effect of the other three factors. Every
factor was the effect of some related reasons which are also included in the diagram. For
example, the "Managenent's Limits" factor represented the group of "Process Inconsistency,"
"Insufficient Executive Attention," "Limited Resources," and so on.
The concluding statement did not result in a desirable finding, but it at least pointed out
where the true problems were. It states: "The current financial policies and management
resource limits have worsened the work conditions and material handling issues, eventually
driving down the EM on-time delivery performance." The key reflection from this conclusion is
that a sustainable improvement in delivery performance can hardly be made without a wellsuited financial policy and more focused management.
Shiba, Shoji, The Language Processing Method. Document ML0060, Cambridge, MA: Center for Quality of
Management, 1997.
33
The periodic financial measure and
management resource limits have
worsened the work conditions and
material handling issues, eventually
driving down the EM on-time delivery
performance.
What were the most critical factors that
have prevented the company from
achieving 95 percent of on-time delivery
performance for Electro-Mechanical
products?
Process
Inconsistencies
Insufficient
Discipline
Insufficient
Executive
Attention
Management's
Wot
Inadequate
Limits
Condition
Work
Conditions
Issues
Limited
Resources
Financial
Policy
Material
Handling
Financial
Issues
Drive
Inefficient
Supply
Unleveled
Demand
& Handling
Mismatched
Replenishment
System
Figure 3.1. LP View of EM Late Delivery Problem
34
3.3
Ishikawa Analysis (Cause-and-Effect or Fishbone Diagram)
To explore all possible causes related to the investigated problem, I decided to conduct a
cause-and-effect analysis based on the method introduced by Dr. Ishikawa a couple years ago. It
is a highly visual technique which assists the process of defining the elements of a problem or
event.' The benefits of this method are that it can help to focus the team on causes, not
symptoms, and graphically display a snapshot of the collective knowledge and consensus of the
team around the problem. Without such a diagram, it would be very difficult to know how well
or poorly the team considered the possible causes of the problem. Five main categories were
selected to form the structure of the fishbone: Work Force (Man), Equipment (Machine), Process
(Method), Materials (Material), and Product Development. The next step was to uncover all the
potential causes by answering "5 Whys" down five levels as shown in the example below: 2
Why
Answer
1 st
level:
Why late?
Process
2 nd
level:
Why process?
A
3rd level:
Why A?
B
4' level:
Why B?
C
5th level:
Why C?
D
The thoroughness of the analysis can be diagnosed by seeing how many levels of
branches there are. A fishbone diagram with only one or two levels of branches might be
considered a superficial analysis. The complete fishbone diagram for this analysis is included in
Appendix C. However, for the reader's convenience, a simplified version of the fishbone is
presented below to show major potential sources of the delivery problem.
Wilson, Paul F. et al., Root Cause Analysis: A Tool for Total Quality Managemnent. Milwaukee, WI: ASQ
Quality Press, 1993, page 195.
2 Shiba, Shoji and David Walden, Four Practical Revolutions in management.
Cambridge, MA: Center for Quality
Management, 2001, page 158.
35
MATERIALS
PROCESS
WEAK
COMMUNICATION
*UNQUALIFIED *+
NQPARTS LFE
INSUFFICIENT
UlMY
UNTIMELY
COLLABORATION W/
SUPPLIERS
LATE
PARTS
LO
LACK OF
CONSISTENCY
INEFFICIENT
IIBLT
NOT
SUSTAINABLE
REPLENISHMENT
MODEL
LATE
PFP
NOT
DEPENDABLE
COMPLEXITY OF
"ONE SHOT"
*
LOW
MOTIVATION
DELIVERIES
OFEM
PRODUC TS
+
UNOPTIMIZED
:UNOPTIMIZED
*,UTILIZATION
S
**us**
NON PROMANUFACTURING
DESIGN
PRODUCT DEVELOPMENT
,
, PRODUCTION
S
#* WEAK WORK '*****
DISCIPLINE *
EQUIPMENT
WORK FORCE
Figure 3.2. Fishbone Diagram of Late Delivery Problem
Due to the time constraints of the internship, the project team foresaw that it could not
explore all potential causes but must focus on a few critical ones. The factors circled by a solid
line were the areas that the team would like to investigate. The causes circled by a dotted line
would be reviewed and improved by the managers who are in charge in those areas.
36
4.j
ANALYSIS
THE VALUE SYSTEM
This chapter describes the analysis of the value system of the Instron Electro-Mechanical
Business Unit to help readers understand the current state of demand, products, and supply forces
related to the operation of this business unit. The analysis examines all the core activities of the
company in the relationship with a larger stream of activities of buyers, suppliers, or distributors.
It helps to bring to the surface strengths and weaknesses in the current supply chain management
of the company, which would serve as opportunities for improvements. This chapter also
includes recommendations and guidelines for Instron's inventory and supplier policies.
4.1.
Overview of Instron EM Supply Chain Model
Conceptually, Instron has pursued a simple, direct, and powerful build-to-order supply
chain model since the company was founded. Instron does not have a retailer, wholesaler, or a
distributor in its supply chain. It fills customer orders directly. Instron receives customer orders
through its own sales force and recently via the Internet, buys materials, manufactures, and ships
products to customers.
Figure 4.1. below shows a diagram of the Instron Elctro-Mechanical supply chain. The
whole supply chain includes only three phases: customer, manufacturer, and supplier. The
retailer and distributor phases are taken out of the supply chain. The Instron's sales and
marketing department is the company's contact point with customers. It performs all processes
included in the typical customer order cycle with customers and those of the replenishment cycle
with the manufacturing business unit. Therefore, the sales and marketing representatives, who
generate customer orders and control the information and finance in-flows, have a very important
role in Instron's supply chain management. The engineering department provides design and
technical support for manufacturing and engineering services for customers. Instron has a
37
captive machine shop in Binghamton, New York. This machine shop plays the role of an
internal supplier. It makes and supplies the majority of needed machined parts and some other
accessories to the Canton plant.
' Tier
Supplier
4~
4
2" ra
Machine--Shop
->Supplier
3" Tier
Supplier
2~~Tier
2"
Supplier
3' Ter
Supplier
2~ Tier
2"
Supplier
End
User
End
User
End
s1Tier
Supplier
EMMFG
Ni"
3"'d Tier
Supplier
4
....
3"'Tie
Supplie.
--
Owner
'Sales
Mktg
Owner
User
Owner
.. User
"'Tir
upier
2"nd'Tier
SupplierSppir
1tTe
End
Eng.
3"'dTier
Supplier
,D
SUPPLIERS
-p-
............................
INSTRON
CUSTOMERS
Material/Product Flow
Information/Financial Flow
Figure 4.1. Instron EM Value System Diagram
Based on historical data, every year, the Electro-Mechanical Business Unit made and
shipped thousands of EM testing systems to a large customer base around the world, in which
many were repeat customers. On the supply side, the Electro-Mechanical Business Unit
currently has 74 active first-tier suppliers, of which the 18 percent of top suppliers have supplied
80 percent of total material cost volume.
38
4.2.
Process Analysis
It is generally agreed that "supply chain is a sequence of processes and flows that take
place within and between different supply chain stages and combine to fill a customer need for a
product."' It is useful to look at the cycle view of the supply chain because "it clearly specifies
the roles and responsibilities of each member of the supply chain." 2 Figure 4.2. shows the cycle
view of Instron's Electro-Mechanical supply chain compared with the typical supply chain
process cycles. As Instron builds to orders and sells its products directly to customers, it
bypasses the retailer and distributor phases and reduces the four typical supply chain process
cycles down to two, as seen in the diagram. This definitely reduces costs and lead times that
Instron would have experienced if it followed the full supply chain process cycles.
Instron Supply Chain
Typical Stages
Cycles
+
Customer
Customer
Customer Order Cycle
Retailer
Order
Fulfillment
Replenishment Cycle
Cycle)
Distributor
Manufacturing Cycle
Instron
Manufacturer
Procurement Cycle
Procurement Cycle
Supplier
Supplier
Figure 4.2. Instron EM Supply Chain Process Cycles
'Chopra, Sunil and Peter Meindl, Supply Chain Management: Strategy, Planning, and Operation, Upper Saddle
River, NJ: Prentice-Hall, Inc., 2001, page 7.
2 Ibid, page
8.
39
"
Order Fulfillment Cycle:
The order fulfillment cycle occurs at the customer/company interface and includes all the
processes as shown in Figure 4.3.
Customer
Arrival
Customer
Order Receiving
Customer
Order Entry
Manufacturing
& Shipping
Production
Scheduling
Figure 4.3. Order Fulfillment Cycle
"
Procurement Cycle:
The procurement cycle occurs at the manufacturer/supplier interface and includes all
processes as shown in Figure 4.4.1
Order Based on Manufacturer's
Production Schedule
Receiving at Manufacturer
Supplier Production
Component
Manufacturing & Shipping
Scheduling
Figure 4.4. Procurement Cycle
Chopra, Sunil and Peter Meindl, Supply Chain Management: Strategy, Planning, and Operation, Upper Saddle
River, NJ: Prentice-Hall, Inc., 2001, pagel3.
40
Figure 4.5. shows a generalized process view of a supply chain, based on the suggestion
of R.C. Camp in Business Process Benchmarking: Finding & Implementing Best Practice
(1995). Generally, from the process perspective, every supply chain includes inputs, process
steps, outputs, feedback, and results as shown in the diagram. The beauty of this generalized
process is that it not only illustrates the big picture of the supply chain of an organization with all
key processes, but also highlights the overall performance of each of these processes. Thus, by
making strengths and weaknesses obvious, it is possible to indicate where future improvement
potential exists.'
Overall Logistics
Effectiveness
Quality x Delivery
to customer
Overall Purchase
Effectiveness
Feedback
Quality x Delivery
for supply base
Processes
me=
Results
Overall Production/Equipment
Effectiveness
Availability x Performance x
Quality for Operation
Figure 4.5. Generalized Process View of an Organization
Using Cam's "big picture" concept in the Instron EM situation, we can see in Figure 4.6.
how other process performances affected the overall effectiveness of the supply chain. With the
98 percent quality and 80 percent on-time delivery performance, the effectiveness of the internal
manufacturing business unit appeared stable at 78.4 percent. However, if combined with the
' Brunt, David, "Creating big picture maps of key processes: company activities viewed as part of the value stream,"
Manufacturing Operation and Supply Chain Management. London, England:Thopson Learning, 2001, page 88-96.
41
performance of other processes, the overall effectiveness of the supply chain management was
just over 40 percent!
Overall Logistics
Effectiveness
98% x 80% = 78.4%
Overall Purchase
Effectiveness
Feedback
90% x 90% = 81%
Processes
utt
Results
Overall Production/Equipment
Effectiveness
Overall SC Management
Effectiveness
90%x 8.0% x 90%=664. 8%
8 1% x 64.8% x 78.4% = 41.2%
Figure 4.6. Overall evaluation of SCM effectiveness
Therefore, to achieve a systemwide improvement, the company should realize "the
importance of synergy between different improvement efforts and the need for commitment at all
levels of the company." 2
4.3.
Understanding Demand and Customers
4.3.1. Demand Analysis Approach
To understand the demand patterns for Electro-Mechanical products and its customers, I
analyzed the data of the last four years extracted from the database of the Instron Business
' These actual performance figures are for illustrative purposes only.
2 Kobayashi, I., Twenty Keys to Workplace Improvement.
Portland: Productivity
42
Press, 1994.
System (IBS). Figure 4.7. shows the approach by which I used data to analyze the past demand
and recommend for future improvements.
Phase Out
Obsolete
Reduce
Product
Model
Demand
Models
Variation
Analysis
Focus on
Most
Demanded
Models
Reduce
Product LT
pr
Linear
Production
Explore
B-T-Comp.
Possibility
Improve
Data
Deman, ImroveMarket
rteani
Unders
Response
Analysis
Identify
Preferred
Improve
-g-t
Service/
and
Marketing
Customer tustomers
Strengthen
Customer
Base
Base
Analis
Reach Out
for ce-c
Potential
Customers
--
Exploration
New time,
Market
Nichejj
Expand
Customer
Base
Figure 4.7. Demand Analysis Approach
4.3.2. Understanding Demand Patterns
The historical booking data of the last four years shows that the customer demand varied
for different EM and over time for one year. In terms of models, the data shows strong and
stable demand for all EM single-column testers, whereas for EM dual-column testers, high
demand concentrates on model 4411, 4465, and 5565, average and low-demand spread on the
rest (see Figure 4.8. below). This observation would suggest a continuing and careful follow-up
to such a demand pattern in order to make strategic moves on phasing out less popular models in
order to reduce product variation, and explore the possibility of the assemble-to-order strategy
(see the section 2.4) for preferred models, which can reduce product lead time, linearize
production, and improve market response.
43
The monthly booking data for each model gives a sense of customers' demand patterns
over the period of one year. We can see the typical "hockey stick" phenomenon at almost every
quarter-end and year end. However, the demand patterns are quite different from model to
model, and throughout one year. Acquiring an accurate demand forecast for every month or
quarter is rather difficult; therefore, the demand forecasting has been a challenging task at
Instron. Consequently, an agile, short-lead time manufacturing strategy with a lean supply chain
management would be best for this environment.
UNITS SHIPPED (JAN 1998 - JUL 2001)
U,
I-
z
4442
4443
4444
5542
5543
5544
4411
4464
4465
4466
4467
4469
5564
5565
MODEL
EM Single Column Models
EM Dual Column Models
Figure 4.8. Aggregate demand for EM testing models
44
5566
5567
5569
c0
z
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
MONTH
-
1998 -Ndb-1999 -
000
- O -2001
Figure 4.9. An example of the monthly demand pattern
for an EM model
4.3.3.
Understanding Customers
Instron has had a large customer base for EM testers. Many of them have placed
repeated orders. End users of these testing systems are engineers, research scientists, professors,
college students, technicians, and production operators.
Instron's major customers have included many research laboratories and numerous big
companies in materials, manufacturing, or biotech industries. Their orders add up to 70 percent
of sales volume. Universities and other educational institutions currently account for about 20
percent of sales volume, but, with the rapid growth of material science, they appear as both an
expanding market segment now and promising leads in the future. Today, many students who
have been using these testing systems in their studies or research will likely order the familiar
testers in the future when they hold positions as researchers, quality controllers, or lab managers
in companies or R&D laboratories.
45
A customer-focused policy with the ability to listen to customers and the willingness to
satisfy their needs will definitely bring in substantial rewards for the company. Customers are
loyal only to the companies that understand and address their issues. At Instron, the salespersons
who have good communication and close relationships with customers always create the most
successful leads for the company. Therefore, good marketing and customer service are vital
factors for the company's bottom line and growth.
4.4.
Understanding Products and BOMs
4.4.1.
Products Analysis Approach
Instron has developed a very broad product catalog for EM testers. If we count every
possible combination with different frame capacity, voltage options, controller options, load
cells, display options, language options, accessories, etc, we can come up with a list of tens of
thousands EM testing systems, regardless of custom design and build features for some special
needs that can often happen. Luckily, since the inception of the company, engineers at Instron
have wisely pursued the modular innovation design approach. When they invent new testing
systems, they try to use the same design structures and the highest number of common parts in
old systems. Therefore, every system seems to have a very long and complex bill of materials
(BOM) with many layers of sub-assembly components, but there is a large overlap with other
BOMs. However, due to the complex structure of these BOMs, there had been no complete
analysis done before on the advantage of part commonality.
Thinking that there is a great benefit in capturing that engineering value, I conducted a
complete analysis of the BOM of 55 EM single-column and dual-column frame models. Figure
4.8. below presents my approach in this analysis:
46
Unique
Parts
Recognition
Part
Commonality
BOM
of 55
EM Models
Exhausted
List
Supplier
Base
Critial
Inventory
Commos
Policy
Inventory
Optimization
ABC
Analysis
Sole Source
Development
Supplier
Consolidation
Supply
Chain
Kanban
Placement
Strategic
Planning
Figure 4.10. Approach for BOM Analysis
4.4.2. BOM Analysis
The result of the BOM analysis was very interesting. The Venn diagram in Figure 4.9.
shows the commonality among these frame models. In total, there are 422 parts used in the 55
EM frame models, in which 42 parts are common to all three groups including single-column
models (series 4400 and 5500), dual-column models series 4400, and dual-column models series
5500; 209 parts are shared between the two dual-column models series 4400 and 5500, 55 parts
are shared between single-column models and dual-column models series 4400, and 58 parts are
common between single-column models and dual-column models series 5500.
47
CTotal:
-ing1
422 SKU's
(201 SKU's)
13
130
40
Columnn
r~iDual
16
167
-
Dual Clumn -14
5500 (239 SKU's)
4400 (269 SKU's)
Figure 4.11. Results of BOM Analysis for EM testing systems
4.4.3. Distribution by Value Analysis (ABC Analysis)
To help the company focus its control efforts on the most significant items, I analyzed the
value distribution of these parts using an ABC analysis. The result shows the 80/20 rule is
obvious here: top 20 percent of parts is worth more than 80 percent of total cost volume.
DISTRIBUTION OF VALUE BY SKU's (YEAR 2001 UP-TO-DATE)
A
B
IC
90%
80%
-
70%
60%
40%
I30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
Percnt of Totel
60%
70%
80%
Ntwnbr of SKUrs
Figure 4.12. Distribution of Value by SKUs for EM testing systems
48
90%
100%
In this ABC analysis, items are classified into three categories: Class A items include all
high-value components that typically account for 75 percent of the total annual cost volume and
represent about 10 to 20 percent numbers of inventory SKUs; class B items account for about 20
percent of the total annual cost volume, and class C items are the remaining components of the
list whose value is no more than 5 percent of the total annual cost volume. The value
distribution categories may influence the company's inventory policy. For example, Class A
items account for the major part of the cost volume, and it requires a high-frequency periodic
review policy. Similarly, Class B items also receive a periodic review policy although the
frequency of review is not as high as that for Class A products. Depending on the product value
and lead times, the company may decide to keep low inventory of expensive Class A items and a
blanket policy for Class C items.
Table 4.1. below presents the combined result matrix of the two analyses. The numbers
1,2, 3 in commonality columns indicate parts shared among one, two, or three groups of EM
models as indicated in Figure 4.11. above. Class A items with 44 parts account for 76 percent of
the total annual inventory cost volume, class B items with 169 parts account for 23 percent more
of the total annual inventory cost volume, class C items with 209 parts contribute only 2 percent
of the total annual inventory cost volume:
3
# PARTS
rnfT
1
COMMONALITY
2
1
4
261
70/I
7
r%9013
TOTAL
14
r%
TOTAL PAF
% OF TOTAL OF PAF
% OF TOTAL OF CC
Table 4.1. Result Matrix of BOM Analysis
49
44
76%1
PERCENT
10%
76%
4.4.4.
Guidelines for the Control of Class A Items
The Class A inventory items should receive special attention from managers. The top
five strategies are:
-
Frequently review Class A inventory by top management. In this strategy, class A
inventory is reviewed at a high frequency basis (e.g., a weekly review) and every time
it is reviewed, a decision is made on the order quantity. The frequent inventory
review policy helps management maintain a low Class A inventory level but adequate
enough to avoid stock-out situations.
-
Pay close attention to usage rates, lead times, and safety stock. Review the order
quantity and reorder point volumes frequently. Besides, the company should
influence supply partners to cooperate in establishing the flexible kanban
replenishment plan for Class A items. This allows the firm to keep inventory at an
appropriate level.
-
Make constant efforts to reduce safety stock by influencing both customers and
suppliers to decrease demand variations and supply lead times.
-
Precisely determine control-quantity values.
-
Focus on maintaining the right balance between ordering and holding costs (EOQ
approach).'
4.4.5.
Guidelines for the Control of Class B Items
The Class B inventory items should receive a similar control guidelines applied to the
Class A items, but with a more relaxed periodic review policy (e.g., a monthly review). Order
quantities and reorder points should be checked at least on a quarterly basis. A kanban system
should be established also for the Class B items.
4.4.6.
Guidelines for the Control of Class C Items
As Class C items have very low value but they are required for assembly; therefore, it is
fine to keep them at a relatively high level of inventory and with long reorder intervals (6-12
Simchi-Levi, David et al., Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies,
New York, NY: The McGraw-Hill, Inc., 2000, page 63-64.
50
months). Further recommendations include reducing the number of items stocked, disposing
slow-moving inventory, and increasing component sourcing.
4.5.
Understanding Suppliers
4.5.1. Supply Base Analysis
Using the same approach for the BOM analysis, I mapped the supply base for EM single-
column and dual-column product lines in the Venn diagram in Figure 4.13. as follows:
Dual Column - 4400
Single Column
(56 Suppliers)
(64 Suppliers)
4
6
9
40
11
0
Dual Column - 5500
(55 Suppliers)
Total: 74 Suipyliers
Figure 4.13. Instron EM Supply Base Analysis
Currently, Instron EM has a total of 74 suppliers that supply materials to the EM singlecolumn and dual-column product lines, in which 40 suppliers provide parts for all three groups of
EM tester models, six more suppliers provide parts for both dual-column models series 4400 and
51
single-column models, and one more supplier has parts for dual-column models series 5500 and
single-column models. The dual-column lines for series 4400 and 5500 have shared 54
suppliers. Last year, 42 suppliers from Massachusetts supplied 63 percent of total annual volume
in costs, 29 suppliers from 14 other U.S. states supplied 36 percent of total annual volume in
costs, and three foreign suppliers supplied the remaining 1 percent of the annual volume (see
Figure 4.14.).
DISTRIBUTION OF ANNUAL COST VOLUME BY LOCATIONS
3 Foreign Suppliers
(1%)
29 Suppliers from 14 other
US States
(36%)
'42 Suppliers in
Massachusetts
(63%)
Figure 4.14. Distribution of Cost Volume by Geographical Regions
To help the company recognize and focus on the major vendors, I used the same
approach of the value distribution analysis to categorize suppliers in three groups based on their
volume supplied to Instron EM single-column and dual-column tester lines. Again, the 80/20
rule exists here. Thirteen top suppliers, which represent about 18 percent of the total number of
suppliers, supplied 81% percent of the total annual cost volume last year. The volume supplied
by 37 the top suppliers, which represent the top half of the total number of suppliers, was 98
percent. The other half of suppliers contributed less than 2 percent of the total annual cost
volume. In current status, if Instron currently has strong commitments from the top 20
52
suppliers, then up to 90 percent of the required materials for EM single-column and dual-column
frames can be guaranteed.
DISTRIBUTION OF ANNUAL COST VOLUME BY VENDORS
100%
90%
80%
E
0
70%
U)
0
60%
50%
0
40%
0
30%
20%
10%
0%
1%
3%
20%
30%
41%
49%
58%
68%
77%
86%
95%
Percent of Total Number of Vendors
Figure 4.15. Distribution of Annual Cost Volume by Suppliers
4.5.2. Guidelines for Supplier Policy
To improve the materials replenishment for EM single-column and dual-column product
lines, there are some guidelines that I would suggest Instron consider for its supplier policy:
-
Focus on finding local suppliers for Class A and B items. It is much easier for the
company to communicate, visit, and develop strong relationships with local suppliers,
which may lead to reduced lead times and improve collaboration, especially for justin-time efforts.
-
Influence suppliers to participate in Pull or Kanban systems for materials or parts
replenishment. A Kanban system will help both suppliers and the company to
significantly reduce inventory level, to simplify the inventory control, and to increase
flexibility.
53
-
Manage strategic issues concerning suppliers with commodity teams staffed with
purchasing, engineering, manufacturing, and quality personnel. It needs to be
emphasized that the strategic issues with key suppliers are very important to several
functions of the company and that the system-wide cost is more important than the
immediate price in stand-alone purchasing decisions. The benefits of this
collaboration will outweigh the complexity of the team's work because, with the
various expertise of the team members, many problems and/or value-adding ideas can
be identified earlier in the process, leading to a great deal of savings and gains for the
company. This strategy truly provides a forum for engineering, manufacturing,
quality, and purchasing personnel to influence the criteria for selecting and managing
strategic suppliers.
-
Create and use a certification process that challenges suppliers and makes them proud
to be certified suppliers. This lets the supplier know what your standards are and
ensures that the certification process contains exactly the criteria that are important to
the company. Recognize and reward certified suppliers publicly. Make the suppliers
strive to become better partners and to eliminate mistakes and confusion to create
leaner operations.
-
Continue the effort of consolidating the supply base. The company should reduce the
number of suppliers for each part or component to a few or only one. With a smaller
number of suppliers, the company can share more business volume with them, make
itself their major customer, and thus can influence quality, price, delivery schedules,
and capacity decisions. Moreover, the company can improve its development and
fulfillment operations because fewer and more dependable suppliers will reduce the
number of variables and make fewer mistakes and interruptions.'
Source: <www.1eanstrategies.com>.
54
5.
-
LEAN APPROACH TO SUPPLY CHAIN
IMPROVEMENT
This chapter presents in detail a lean approach to supply chain improvement that I would
strongly recommend Instron to pursue for future development. This method suggests a new
process using lean principles and value stream management to systematically transform Instron's
supply chain into a lean supply chain. This lean approach was initiated in my internship at
Instron, but has not been completed due to time constraints. This chapter includes a brief
overview of the lean supply chain concept, a short outline for a lean solution, and an introduction
of a proposed lean methodology. Also presented is a self-assessment of Instron's key operations
based on lean perspectives and a roadmap for further lean improvement efforts.
5.1.
Overview
Since 1990s, the term "lean manufacturing" has become very popular in many industries
and organizations, but the word "manufacturing" is misleading and has often created false
perceptions of the original concept. Many people still think this term indicates that the
opportunities for improvement using lean principles lies within the manufacturing department.
This narrow thinking has substantially overlooked the potential value and impacts of a lean
approach in a larger context. It is important to realize that the name "Toyota Production
System," the original source of lean thinking, does not express a focus on manufacturing but
includes all of the business elements and support systems necessary to achieve the production
goals. Taiichi Ohno literally defined "Lean Manufacturing" as follows:
This is the manufacturing system developed by Toyota which pursues optimum
streamlining throughout the entire system through the thorough elimination of Muda
(waste), and aims to build quality in at the manufacturing process while recognizing the
55
principle of cost reduction. It also includes all the accompanying technology necessary to
accomplish those aims. I
Apparently, the perfection of only the manufacturing process would not have brought
Toyota Company the outstanding successes that it has enjoyed for decades. Therefore, by
understanding the breadth and depth of the Toyota Production System, we can see that lean
concepts can and should be extended beyond manufacturing into many different functions of a
company including marketing and sales, product development, and supply chain.
In this extended perspective, the lean supply chain can be defined as a system-wide
change program implementing lean principles to identify and eliminate waste from the supply
chain step-by-step. The ultimate goal of the lean supply chain is to develop a system that
provides perfect value to the customer through a perfect value creation process with zero waste,
and, thereby creates opportunities for the company to improve its competitive advantages.2
5.2. Lean Methodology
The transformation of supply chains from the current status to lean is a time-consuming
and complicated task. Many companies have invested a substantial amount of resources in
developing a lean supply chain, but few have succeeded. There are many hurdles that have been
considered as barriers to supply chain improvement. The four greatest obstacles are: (1) the time
lags of the improvement process, (2) the functional silos within and between the organizations,
(3) the lack of a hierarchical structure that can gather all involved parties within the organization,
and (4) the unaligned knowledge and appreciation of senior and operational managers toward
lean principles and supply chain management.
To overcome these issues, David Taylor suggests an approach that applies the techniques
of value stream management to create a "supply chain improvement program in such a way as to
educate, involve and enthuse personnel from all levels and parts of the supply chain via
' Ohno, Taiichi. The Toyota Production System: Beyond Large-Scale Production. Portland, Oregon: Productivity
Press, 1988.
2 Womack, James B., PowerPoint presentation "Lean Thinking for the Canadian
Auto Industry: The Next Leap," in
Ontario, Canada, on 04/12/2000.
56
numerous, self-generating and self-sustaining incremental improvement initiatives."' This
proposed method consists of the six following initiatives that proceed in parallel to develop a
lean supply chain:2
1. Education and Awareness
2. Waste Analysis
3. Appropriate Organization Structure
4. Value Stream Mapping
Lean
Supply
Chain
5. Incremental
6. Evolutionary Development of SC Strategy
Figure 5.1. Lean Approach to Supply Chain Improvement
"
Initiative One: Education and awareness. The objective of this initiative is to
ensure that all involved people, including managers and employees, have a clear
understanding of the scope and objectives of supply chain management, the principles
of lean thinking and value stream management. It also aims to make those concepts
familiar and applicable in the organization.
"
Initiative Two: Waste analysis. This initiative aims to help managers identify and
know how to reduce waste in individual value streams. Structured interviews to
evaluate the "seven wastes" and other perceived wastes should be conducted with
every participant. They may reveal surprising results.
*
Initiative Three: Creating an appropriate organizational structure. The
development of a lean supply chain is impossible without the involvement and
Taylor, David and David Brunt, "Parallel Incremental Transformation Strategy: An Approach to the Development
of Lean Supply Chains," Manufacturing Operations and Supply Chain Management: The Lean Approach. London,
England: Thompson Learning, 2001, page 222.
2 Ibid, page 222-235.
57
support of the senior management, lean supply chain champions, and management
and operation staff involved in supply chain processes. The "three-tier structure"' for
lean transformation can be seen in Figure 5.2.
Senior Management
Understand Lean SC
Authorize Lean Vision
Authorize Improvements
Lean Champions
Develop Lean Vision
Coordinate Activities
Develop Lean Knowledge
Lean Action Teams
Intra-Company &
Inter-Company
Demand
Smoothing
Inventory
Reduction
Map Processes
Eliminate Waste
Quality
Improvemen
Examples of possible
projects
Figure 5.2. Organization Structure for Lean Transformation
(Applicable to each company and for the whole supply chain)
*
Initiative Four: Value stream mapping. In these activities, the lean operational
teams will assess and select the most effective methods of mapping tools (see section
2.2.2.) to create a multidimensional assessment of the supply chain performance.
This is a time-consuming process, but it is critical for identifying waste and
opportunities for improvements. The role of Lean Champions is also very important
in these activities as those who assume it are initial mentors and project coordinators.
Ibid, page 231.
58
"
Initiative Five: Incremental improvement. Once all necessary maps for a targeted
value stream are mapped out, the Lean Champions and other operational groups will
review the maps to identify critical areas of waste, its root causes, and develop an
action plan to eliminate the discovered waste for the value stream. It then becomes a
working model that can be used to make other value streams leaner.
*
Initiative Six: Evolutionary development of supply chain strategy. Once the lean
approach is shown to work for a product flow to a key customer, it can be rolled out
to other product families and other customers. However, as different product families
and /or customer segments may have different characteristics and service
requirements, the lean initiative teams should proceed with the strategy through
incremental steps, value stream by value stream, to ensure the approach complies
with new requirements.
Each of the six initiatives aims to create three effects: (1) to educate involved staff and
prepare them for future self-generating improvement activities, (2) to achieve immediate
beneficial results, and (3) to spread out the success to a wider supply chain.
5.3. Assessment in Lean Perspective
Figure 5.2. below shows the lean assessment result in the form of a spider chart that I did
for Instron using the self assessment page of the website <www.leanstrategies.com>. As the
Web site suggested, I used a 1-to-5 scale, which respectively represents poor to very lean status,
to rate the 21 important aspects of the four critical categories that should be transformed to leaner
operations. These focused categories are customer relationships, product design and
development, order fulfillment, and supply chain management. As I conducted the assessment
just based on my own observation, sense making, and qualitative evaluation, the rating might be
somewhat subjective; however, I hope it could still provide an insightful view on the company
operations for future lean initiatives.
59
Have direct web page contact with customer
Connect to suppliers with Internet technologies
5
Provide product customization with fast response
Certify suppliers
Collaborate with customers
Manage suppliers with commodity teams
\Design for mass customization
Develop strategic long-term partners
Reduce the supply base
Design for manufacture
-
Design for quality & reliability
---
Eliminate production losses
Implement fast time-to-market techniques
Improve quality & reliability
Collaborate with suppliers in development
Outsource for the right reasons
.,.,/Reduce fulfillment time
Collaborate with suppliers in fulfillment
Increase flexibility
rganize for mass customization
Collaborate with engineering
CUSTOMER RELATIONSHIP
PRODUCT DEVELOPMENT
ORDER FULFILLMENT
SUPPLY CHAIN MANAGEMENT
Source: www.leanstrategies.com
Figure 5.3.
Instron EM Lean Assessment Graph
The assessment chart shows Instron is strong in customer relationships, design for quality
and reliability, product quality, and outsourcing for the right reasons. As a matter of fact, Instron
has achieved a high customer satisfaction rate for the last five decades. Customers have highly
praised the company for good engineering designs, product quality, and customer service.
Instron has guaranteed its customers that it will provide technical support and spare parts for
every machine that it has installed for the last five decades. On outsourcing, since the '70s,
Instron has pursued a strategy to outsource the majority of its supply demand and has kept in-
60
house only the core competencies such as product design and development, operating system
software, and final assembly and testing. Today, from 90 percent to 95 percent of the total
number of needed parts or components come from external suppliers. This effective strategy has
freed up a great amount of resources and investment for Instron.
The areas that are considered as having an average lean performance are the
responsiveness to custom orders and markets, the increasing of flexibility in order fulfillment,
the preparation for mass customization, and the elimination of production losses. In the Ishikawa
analysis, the interviewed engineers admitted that their modular design focuses more on product
quality and the convenience for future design rather than on the ease of manufacturing. The
solely pro-engineering mindset might overlook value opportunities it could have offered to the
company through collaborations with manufacturing and suppliers. The flexibility in order
fulfillment and mass customization preparation should also be initiated by the collaboration of
engineering, manufacturing, and supply forces. The breaking of functional silos will open up
more opportunities for becoming a leaner operation.
The lean improvement effort should be focused on the areas with the rating of 1 or 2. In
the product development area, the weak areas are designing for manufacture, designing for mass
customization, and collaborating with suppliers in product development. In order fulfillment, a
new focus should be placed on reducing lead times and increasing the collaboration with
suppliers and engineers in the order fulfillment processes. In supply chain management, the lean
effort should be used to improve the strategic management of the supply base, such as
consolidating the supply base, developing strategic long-term partners, managing suppliers with
a commodity team, promoting certified suppliers, and implementing advanced information
technology to speed up and improve supply chain processes. These issues will be further
discussed in the following section.
5.4. Lean roadmap
Based on the lean assessment of Instron described in the previous section, I recommend
that a strategic plan for future supply chain improvement at Instron be implemented. Together
with the lean solution and methodology presented earlier in this chapter, this plan is designed to
serve as a roadmap for a lean transforming process at Instron.
61
A supply chain involves many functions in its processes. In order to successfully
transform a traditional business system into a lean supply chain, changes must take place across
all key functions. Figure 5.4. shows the big picture of the necessary changes in the four
important areas: (1) customer relationships, (2) product development, (3) supply chain
management, and (4) order fulfillment. The improvement in some of these functions will have a
positive impact on the success of other areas and eventually the whole company.
Collaborate
Fast
Resnonse
W/
ManufacturinR
Collaborate
Great
Serices
Customer
Relationship
Design-forManufacture
Collaborate
w/ CustomersN
Low Price
Fast
Time-To-Market
Technioues,
Collaborate
K
Figure 5.4. Lean Roadmap for Instron
(Source: www.leanstrategies.com)
62
I
5.4.1.
Lean Approach to Customer Relationships
As Instron has had a large and loyal customer base, the company should continue to focus
on providing its customers with greater value at lower prices. It should listen seriously to
customers' feedback and satisfy them in the most appropriate way. In addition, Instron should
look for opportunities for improvement in product development, supply chain management, and
manufacturing in order to reduce the response time and price for customer orders while
continuing to increase product and service quality. We always need to keep in mind the
importance of specifying the value of our product and service from the standpoint of the end
customer.
5.4.2. Lean Approach to Product Development
The big improvement in this function should focus on increasing collaboration with
customers, manufacturers, and suppliers. There is so much value that can be obtained from these
collaborative processes. By engaging customers in them, designers can satisfy their
requirements for the product the first time, and thus eliminate design changes late in the design
process when they can be very expensive. Designers also can recognize market's trends early,
which helps to refocus technology and innovation on issues that are important in the marketplace
and to accelerate time-to-market.
By including manufacturing people in the product development team, the designers will
have a great resource in manufacturability issues; thus, their product designs can be
manufactured easily and can meet targeted quality, reliability, cost, and schedule goals. They
can also reduce costly late engineering change orders, facilitate ramp-up to production, and
increase the speed of the entire product development process. In addition, the collaboration will
provide opportunities for improved modular assembly, cellular manufacturing, mass
customization, or introduction of new technologies.
5.4.3.
Lean Approach to Supply Chain Management
Instron has developed a large supply base over the years along with its volume growth
and product proliferation. The problem with having so many suppliers is that the business
volume shared among them is so small that very few good working relationships have been
established. The company's buying power and influence are low with all of them. Purchasing
63
decisions then have been made based primarily on price. The synergistic benefit of collaboration
has rarely been obtained.
To improve supply chain management, Instron needs to consolidate its supply base,
develop strategic partners, and implement more advanced technology in supply chain processes.
By consolidating the supply base, Instron will have fewer and more dependable suppliers to deal
with while, as their major customer, the company will have increasingly influential power on
quality, price, and delivery schedule. The development of strategic long-term partners will allow
Instron to fully understand its supplying partners' capabilities and to have frank discussions at all
levels about technical, quality, cost, and capacity-planning issues. That smooth and open
communication will permit better solutions for both sides, speed development and fulfillment
operations, and produce savings to be shared.
Along with having a website for customers, Instron should continue to implement
Internet technology to connect to its suppliers with each other and to incorporate bar coding in
inventory control. The Internet and other supply chain advanced technologies will make it much
easier and more effective to share information, exchange transactions, and accelerate business
processes with suppliers. Great savings and process effectiveness are just some of the numerous
benefits that can be received from these new technologies.
5.4.4.
Lean Approach to Order Fulfillment
As a core component of Instron's supply chain, the order fulfillment/manufacturing
business unit plays the very critical role of a driving force in the value creation process. To
produce increasingly greater value at lower cost, Instron's manufacturing arm should focus more
on lean manufacturing and better collaboration with engineers and suppliers in the order
fulfillment cycle. The lean solution and approach presented in sections 5.2 and 5.3 are an
excellent lean transforming process that can help the company quickly become leaner, and thus,
more efficient. The application of five lean principles and value stream management in this
approach would help the company to pursue a perfect continuous improvement cycle while
eliminating more waste and inefficiencies. It would also permit lead times, setup times, and
inventory levels to be significantly and steadily reduced. In addition, the effective collaboration
with engineers will add value to the supply chain through better product designs that are easy to
manufacture, test, and inspect, making them more compatible with existing equipment. Good
64
collaborations with suppliers will help the company to lower costs by receiving high quality parts
or materials on-time and utilizing suppliers' resources and expertise in product development and
order fulfilment. The delivery of product to market will happen sooner, at lower cost, with more
savings for all process partners, including manufacturer, supplier, and customer.
65
6.PILOT REPLENISHMENT
MODEL
This chapter focuses on the materials replenishment model for the machine shop in
Binghamton, New York. The first task is to determine the most economic lot sizes for each of
the parts that the machine shop has been supplying to the EM final assembly line at the Canton
plant. The current lot sizes of many parts supplied from Binghamton have been considered to be
improperly calculated for the current demand level, and thus have not supported the desired build
plan. The stock-out potential as well as the excess inventory situations have created unexpected
rush orders and/or undesirable inventory levels. Besides, havoc demand has caused problems for
production planning and productivity optimization. The capacity model was developed to
provide answers to the lot-sizing issues.
In addition, the chapter will address three other basic inventory management questions:
1.
How often should inventory levels be reviewed?
2. When should an order be placed?
3. What quantity should be ordered?
The inventory review frequency and the reorder point answer the first two questions. The
last question is solved by the economic order quantity (EOQ) theory.
6.1.
Capacity Model for Lot Sizes
Simply put, a lot size is the quantity that is either produced or purchased at a given time.
In a lot-sizing decision, supply chain managers need to consider at least three kinds of costs:
- Unit cost or material cost is the average price paid per unit purchased. Buyers may
increase lot size if there is a volume discount. However, in this pilot material
66
replenishment model, the unit cost is the fixed standard cost of producing a unit at the
machine shop in Binghamton.
-
Ordering cost: Ordering cost for products purchased from an outside supplier
typically include the cost of transmitting the order, the cost of receiving the product,
the cost of placing it in storage, and the cost of processing the payment. Ordering cost
for products made inside the company typically include the costs of processing the
transfer request, the cost of setting up production to produce it, the cost of receiving
it, and the cost of documentation. In the pilot project the ordering cost is the cost of
setup times.
-
Holding cost is the cost of keeping one unit in inventory for a specified period of
time. It is the combination of the cost of capital, the cost of physically storing the
inventory, and the cost that results from the product becoming obsolete. At Instron,
the annual holding cost is estimated at 30 percent of product cost, which includes 15
percent of capital cost, 10 percent of storing cost, and 5 percent of disposition cost.'
To reduce only the holding cost, managers would decrease lot sizes and cycle inventory.
However, in many cases managers have to increase lot sizes and cycle inventory to reap the
benefit of economies of scale in purchasing or to reduce ordering cost. Therefore, when making a
lot-sizing decision, a manager must make a trade-off between ordering cost and holding cost to
minimize the total cost 2 . Figure 6.1. below illustrates the concept of cost trade-offs and the
position of the economic order quantity.
1Wheeler, Daniel H., " Pulling a Job Shop into Supply Chain Management," Master's Degree Thesis, MIT Leaders
for Manufacturing Program, June 2000.
2 Chopra, Sunil and Peter Meindl, Supply Chain Management: Strategy, Planning, and Operation, Upper
Saddle
River, New Jersey: Prentice-Hall Inc., 2001, page 138-141.
67
k
Annual Cost
Total Cost
Lowest Total Cost
(EOQ)
Holding Cost
Ordering Cost
Material Cost
Lot Size
Figure 6.1. Cost Trade-offs in Economic Order Quantity
For any single part, the optimum lot size can be derived from the economic order quantity
(EOQ) model as shown below.' The optimum lot size (Q*) balances setup or ordering costs (K)
with holding costs (hC) based on demand (D).
Q* = -4(2*K*D/hC)
[1]
For multiple parts, we can extend the model by evaluating demands and holding costs for
different items, and the total machine time available. In addition, since we are in a production
environment, we use setup times (A) rather than a ordering costs. The value of the setup time is
the parameter X. In optimization theory, the variable X is known as the Lagrangian multiplier or
the shadow price representing implicit cost of setup time.2 The extended model is shown as
follows with subscript i denoting the individual parts being considered:
1Simchi-Levi, David et al., Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies,
NewYork, NY: The McGraw-Hill Companies, Inc., 2000, page 45.
2Wheeler, Daniel H., " Pulling a Job Shop into Supply Chain Management," Master
Thesis, MIT Leaders for
Manufacturing Program, June 2000.
68
Qi =
(2 * X * Ai * D2)/ (hi*C2)
Our goal is to find all the lot sizes
[
[2]
Qi for every part that we are investigating.
side of the above equation we know all but X. Thus, we need to find X to calculate
On the right
Qi. To do this,
we need some more known factors that relate to either X or Qi . Therefore, we name W as total
machine hours available and set it equal to the sum of total setup times and total run times. This
creates the third equation':
W =
Z (Ai * D1 / Q,)
+
Total setup times
T (
* Dies
[3]
Total run times
Total machine
time available
In the above equation, Ri is the machine run time for a specific part denoted by subscript
i, and Di /
Qi gives the number of lots built each year. We substitute Qi in equation
(3) by its
value in expression (2) and solve for X:
W =
E(Ai*D)*41hCj/(2*X*
W =
X (Ai * Di )*
W - E(Ri*Di)
[W - E (R * Di ) *A
=
=
A 1 *D,)
hi C/ (2 * Al * DI) * 1/
(A * Di
+
F (R, * Di
X +
4 hi C/ (2 * Ai * D)
Z (Ri * D, )
* 1/
(A, * Di )*1 hi C,/(2 * Ai * Di)
1Wheeler, Daniel H., " Pulling a Job Shop into Supply Chain Management," Master Thesis, MIT Leaders for
Manufacturing Program, June 2000.
69
[W - E(Rj*Dj)]*
=
E
4
h1 Ci*Ai*Di/2
We obtain the result shown below:
hjCj*Aj*Dj/2
W -
*
A
1
* Di )
When we know X, we can calculate all of the lot sizes. In the following examples, we
define the efficiency as the ratio of the total setup times and run times needed for the calculated
lot sizes over the total available machine time. In solving for X, to deal with unexpected
conditions, one may want to target an efficiency lower than 100%. For the Yam machine cell
used in the analysis, the targeted efficiency, based on operator's experience, was about 85%.
Figure 6.2. shows the results of the analysis of 13 parts produced at Instron's machine
shop in Binghamton, New York.2 These lot sizes were calculated based on the extended EOQ
model described above and the assumptions listed on the upper left corner of the figure:
-
Holding cost is 30 percent of product cost
-
Hours Machine/Year: 4,160 hours, resulted from the product of two shifts per day and
40 hours per week per shift and 52 weeks a year.
-
The machine was assumed to run at 95 percent of total time during the year. The
other 5 percent of time was reserved for machine maintenance or unexpected
breakdowns.
The Lagrangian multiplier (X) value in this analysis is 0.33. The efficiency is 84.3%. This
value is fairly good considering the existing status of the Yam cell at the machine shop in
Binghamton, New York.
2
Rosenfield, Don B., advisor to the internship, June-December 2001.
Actual figures in Table 6.1. and 6.2. are made-up for illustrative purposes
only.
70
Holding Cost
Hours/Month
Hours/Year
30%
347
Available
4,160
0.95
Avail hours, W
3,952
Item
Annual
Demand
Di
units
1
2
3
4
5
6
7
8
9
10
11
12
13
Total
200
50
55
30
150
220
30
60
30
10
55
100
20
Total
Total
Lagrange Avg.
Multiplier Lot Size Lots _Units
Efficiency
1.631
6211 1,0101 84.3%
0.33
Holding Tot Run Lot Size Assy Lot
Size
Time
Factor
Cost
Setup
Time
Run
Time
Std
Cost
Ai
Ri
Ci
hiCi
DiRi
Qi
$
$
hrs
units
hrslot hrs/unit
2.00
2.00
2.00
2.00
2.00
2.00
5.00
1.00
1.00
1.00
5.00
3.00
3.00
1.90
3.50
3.00
1.50
0.40
1.70
4.40
1.50
1.50
7.00
4.40
0.70
1.60
288
435
1,166
1,220
48
233
464
1,244
1,244
1,337
466
71
182
86
130
350
366
14
70
139
373
373
401
140
21
55
1,010 1_1_1,880
Lots /
year
Tot
Setup
Tot
Time
hrs
hrs
131
81
139
105
46
124
102
106
75
45
139
57
40
2
1
1
1
4
2
1
1
1
1
1
3
1
100
50
55
30
38
110
30
60
30
10
55
33
20
200
100
110
60
75
220
150
60
30
10
275
100
60
580
275
275
105
135
594
282
150
75
80
517
170
92
1,189
20
621
1,450
3,330
380
175
165
45
60
374
132
90
45
70
242
70
32
Table 6.1. Part Lot Sizes based on Capacity Model
The capacity model is useful as what-if analyses to estimate the effect of certain factors
on the lot sizes of these parts or the utilization of the machine's capacity. For example, we can
also see the effect of setup time reduction on lot sizing by replacing the original setup times with
the reduced ones. If we can reduce setup time by one-half, then the number of lots per year
increases from 621 lots per year in the base case to 860 lots per year. Then the lot sizes become
smaller, representing a leaner, more flexible production flow.
71
30%
Holding Cost
Hours/Month
347
Available
4,160
0.95
Avail hours, W
3,952
Hours/Year
Total
Total
Lagrange Avg.
Units
Multlier LotSize Lots
0.16
1.171
Efficiency
8601 1,010
72.2%
Tot
Holding Tot Run Lot Size Assy Lot
Setup
Run
Std
Demand
Di
Time
Al
Time
Ri
Cost
Ci
Cost
hiCi
Time
DiRi
$
$
hrs
Item
Annual
i
units
hrs/lot hrs/unit
Factor
Size
Lots /
Setup
Tot
year
Time
Time
hrs
hrs
Qi
units
1
2
3
4
5
6
200
50
55
30
150
220
1.00
1.00
1.00
1.00
1.00
1.00
288
1.90
435
3.50
3.00 1,166
1.50 1,220
48
0.40
233
1.70
86
130
350
366
14
70
380
175
165
45
60
374
93
57
98
74
33
88
1
1
1
1
3
1
200
50
55
30
50
220
200
50
55
30
50
220
580
225
220
75
110
594
7
30
2.50
4.40
464
139
132
72
1
30
75
207
8
60
1.50
1,244
373
90
75
1
60
30
9
30
1.50
1,244
373
45
53
1
30
15
10
10
0.50
0.50
0.50
7.00
1,337
401
70
32
1
10
5
120
60
75
11
55
2.50
4.40
466
140
242
98
1
55
138
380
12
100
1.50
0.70
71
21
70
40
2
50
75
145
13
20
1.50
1.60
182
55
32
29
1
20
30
62
1,880
841
16
860
973
2,853
1
1,010
Table 6.2. Part Lot Sizes with Reduced Setup Times
6.2.
Inventory Review Frequency
Instead of a periodic review system, the Electro-Mechanical Business Unit has been
choosing a continuous inventory review policy because it significantly reduces potential
inventory stock outs while requiring less safety stock and thus lowering inventory carrying costs.
Manufacturing operators and materials handling personnel have the responsibility of carrying out
the review on a continuous basis. In the currently implemented Kanban system at both sites,
Canton and Binghamton, each stocked part has been placed at a specifically designated location
or in bins with a Kanban card on which the minimum quantity (which is the reorder point) for
that part is written. Whenever the operators or materials handlers see the minimum quantity of
any stocked part is reached, they pull the card from the stock location and place it in an order
bin, which will trigger the purchasing department or planners to order another lot of that part on
the same day.
72
6.3.
Determining the Reorder Point (ROP)
Since we can characterize Instron's manufacturing strategy was assemble-to-order and
the ordering process between Canton plant and Binghamton machine shop as one with multiple
order opportunities and fixed order costs, the inventory policy that should be used is a (s, S)
policy, in which the reorder point (s) is different from the order quantity, or more correctly
speaking, the order-up-to-level quantity (S) 1 .
Inventory Position
A
S
Inv.
Level
Lead Time
s
Ss
Time
Figure 6.2.
(s, S) policy with multiple order opportunities
The reorder point (s) is the sum of the average demand over the lead time (DOLT) and a
level of safety stock (SS).
ROP = DOLT + SS
[5]
The average demand over lead time (DOLT) is the average manufacturing demand over
the vendor's supply lead time. DOLT is simply acquired by multiplying the average demand per
a given time unit (m) with the lead time (LT):
Simchi-Levi, David et al., Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies,
NewYork, NY: The McGraw-Hill Companies, Inc., 2000, page 51-55.
73
DOLT = (m) * (LT)
[6]
Demand per given time (m) can be either the average forecasted demand or the average
historical demand. The lead time (LT) is the time it takes a vendor to supply the manufacturer
with a new lot of materials. If a vendor has the requested inventory stocked in his or her
warehouse, then this is simply the time to order and ship product to the manufacturer. If a
vendor has to build the lot before he or she can ship to fulfill the order, then the lead time is
defined as the time it takes the vendor to manufacture the parts and the time for ordering and
shipping.
To provide a buffer against the variability of demand, which frequently happens, a safety
stock (SS) must be added to the reorder point equation. Safety stock is calculated based on the
statistical probability that demand could be higher than average. It includes the standard
deviation of demand (a) over a chosen time period and a desired service level representing the
probability that the parts are available for demand. Instron management agrees that service
levels between 95 percent and 97.5 percent are reasonable; with stock-outs happening once for
every 20 to 40 orders on average. This probability is then translated into a z-statistic value
corresponding to a normal distribution at the given probability level. The safety stock (SS) is
then calculated as follows:
* z * 'LT
SS=
6.4.
[7]
Determine the Order Quantity
The value of the order-up-to-level, S, is calculated based on the Economic Order
Quantity (EOQ). As presented above, the economic order quantity
Q =
4
(2*A*D/hC)
In which:
-
A is the ordering cost, estimated $20 at Instron
-
D is annual average demand for a specific part
74
Q is determined
as follows:
-
h is the holding cost expressed as a percentage, estimated at 30 percent annually for
Instron
-
C is material or part cost
Then, the order-up-to-levell is:
S = max {Q, m*LT} + SS
[8]
Or:
S = max {Q, m*LT} + (a * z*
'ILT)
where max means to take the maximum of order quantity Q or (m*LT).
6.5.
Examples of Calculation
I provide an example in this section to illustrate how to calculate the reorder point (s), the
order quantity (Q), and the order-up-to-level (S) using the provided equations. In practice, we
can create an Excel template to obtain these values conveniently.
Table 6.4. and Table 6.5 shows the monthly usage and some necessary inventory
parameters of a part X: 2
MONTH
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
DEMAND
9
21
33
12
17
27
16
8
35
13
19
30
Table 6.4. Monthly Demand of Part X
Simchi-Levi, David et al., Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies,
NewYork, NY: The McGraw-Hill Companies, Inc., 2000, page 51-55.
2 Actual figures in Table 6.4. and 6.5. are made-up for illustrative purposes only.
75
INVENTORY PARAMETERS
VALUE
Standard Unit Cost (C)
$300.00
Ordering Cost (A)
$45.00
Holding Cost (h)
30%
Total Demand in Year 2000 (D)
240
Monthly Demand Average (m)
20
Monthly Demand St Dev. (a)
9.30
Supply Lead Time (LT)
30 days
Desired Service Level
97.5 %
z-value (z)
1.96
Table 6.5. Inventory Parameters for Part X
With provided information, we can find all the values as follows:
DOLT
= (m)
=T*
SS
* (LT) = (20 units/mo.*12mo./365days) * 30 days
= 19.80 units
z * 41LT
= 9.3 * 1.96 * 4 30/30
= 18.20 units
= DOLT+ SS = 19.80 + 18.20
= 38.00 units
s
=
ROP
Q
=
\I(2 * A * D / hC) = 4 (2 * 45 * 240 / (.30*300))
As DOLT = 19.80 units >
S
= DOLT + SS
Q
= 15.50 units
= 15.50 units, then:
= 19.80 + 18.20
= 38.00 units
From these calculations, we see that there are four factors that directly affect the reorder
point (s), which is considered as the minimum inventory level. These are the demand average,
the demand variability, suppliers' lead times, and targeted service level. Usually, we don't want
to reduce the desired service level and cannot control the demand average. However, if we can
somehow reduce the suppliers' lead times as well as streamline the demand, then we can
significantly reduce the level of the reorder point, then also the overall inventory level, which
76
will lead to increased inventory turns and cost savings. For example, if we have another part
with almost similar parameters, except the lead time and demand variation are about 50 percent
of the former, say, the lead time now is 15 days, and the demand standard deviation is 4.65, then
we have the results as follows:
DOLT
=
(m) * (LT) = (20 units/mo.*12mo./365days) * 15 days
= 9.90 units
SS
=
(*
= 9.3 * 1.96 * 4 15/30
= 6.40 units
s
=
ROP
= DOLT + SS = 9.90 + 6.40
= 16.30 units
Q
=
\I(2 * A * D / hC) =V(2 * 45 * 240 / (.30*300.00))
z * 41LT
As DOLT = 9.90 units <
S
=Q + SS
Q
= 15.50 units
= 15.50 units, then:
=
15.50 + 6.40
= 21.90 = 22.00 units
With the 50 percent reduction in demand variation and supply lead time, the reorder point
level is reduced more than 57 percent, and the order-up-to-level is also cut down by 42 percent.
By implementing the lean supply chain approach introduced in Chapter 5, Instron can gradually
streamline its production - which would level its demand, and increase collaboration with its
suppliers to influence the lead time reduction.
77
7-
RESULTS AND RECOMMENDATIONS
This internship project provided great opportunities for academic research and business
improvement practice. This chapter presents the results in both areas. The academic results
include the successful application of various management tools for problem identification, value
chain analysis, and solution implementation. The business results consist of a thorough rootcause analysis, a set of recommendations on lean supply chain management, and a pilot
replenishment project for Instron's machine shop in Binghamton, New York. The thesis
concludes with important recommendations for future improvements.
7.1.
Academic Results
Instron's manufacturing and business environment provided an ideal setting for utilizing
advanced academic knowledge in the real manufacturing world. By comparing the management
theory and on-site practice, I gained a great deal of valuable learning and made insightful
discoveries during the internship process. These value-adding lessons could not be better learned
in any other setting.
The successful application of many management tools including the LP method, Ishikawa
analysis, and process mapping, established a sound approach for a thorough root- cause analysis
and concurrently helped me to develop a better understanding of the logic and purpose of these
tools. The interviews with managers and executives as well as group discussions helped me to
learn how a business strategy or process was considered, developed, and implemented in a real
business environment. The internship project also gave me a good chance to observe the
dynamic interactions within an organization using the three-lens approach introduced in the
Organizational Process class at the Sloan School of Management: (1) strategic design lens, (2)
78
political lens, and (3) cultural lens.' The value chain analysis and the supply chain application
reinforced my understanding of capacity management, inventory management, and the
interactions and tradeoffs between determining factors such as order costs, holding costs, setup
costs, lot sizes, etc.
The most valuable discovery was the possibility of extending the lean principles into
Instron's non-manufacturing areas, including product development, customer relationships, order
fulfillment, and supply chain management. This new approach has provided a more feasible and
sustainable process to lean transformation, which would significantly improve the company's
competitive advantages. However, it's important to understand that this process requires a
substantial amount of learning, commitment, and involvement by the executives, managers, and
employees, as well as from outside partners.
7.2.
Results at Instron
This internship project involved multiple potential improvements to the operation
performance and supply chain practices at Instron ElectroMechanical Business Unit. First of all,
the 360-degree interview combined with the LP and Ishikawa analyses provided Instron
management with a complete root-cause analysis and a big-picture perspective for improvement
initiatives. In addition to an exhaustive list of all related problems, the analysis also showed the
interactions and cause-and-effect relationship of these factors.
This led to the development of a
logical action plan that could help the management to prioritize improvement efforts and, stepby-step, to conduct these initiatives effectively.
For example, responding to the issue of
insufficient supervisory resources, the management quickly promoted a product manager who
has streamlined many production problems.
The value chain analysis revealed many simple truths in Instron's supply chain. It
provided the company with a clear, simple, and useful understanding of the three most critical
components of its supply chain: products, customers, and suppliers.
For example, the product
structure analysis showed the great engineering strength in modular design. Instron
management should take more advantage of the substantial commonality of parts among many
different Electro-Mechanical testing models in order to reduce inventory levels and create more
Ancona, Deborah et al., Organizational Behavior & Processes, Cincinnati, Ohio: South-Western College
Publishing, 1999, M2, page 1-97.
79
flexibility for its manufacturing strategy.
Concurrently, the analysis also showed that the
collaboration between engineering and manufacturing was rather insignificant. Both sides
rarely used the expertise of the other group to enhance their own performance or to create more
value for Instron's products and processes. The supply base analysis combined with supply
value distribution studies revealed insightful paths and focal points for future cooperation with
supply partners.
The set of recommendations on lean supply chain management presented Instron
management with a more radical option for lean transformation, which has been considered as
one of the most effective and sustainable processes to strengthen a company's leading position
and competitive advantages. In addition, the assessment and suggested roadmap on lean
perspectives provided Instron with a more structured way to accelerate the desired improvement.
The practical contribution of the project was the development of a simple yet effective
material replenishment model that will allow the company to compute the right lot sizes, reorder
points, and order quantities. The model provides the appropriate economic lot sizes by balancing
the setup costs and holding costs. Consequently, this will improve the overall on-time delivery
performance, the bottom-line, and customer satisfaction. Regrettably, the length of the
internship prevented me from fully implementing the pilot model and observing the end results.
However, based on calculations, the implementation of this pilot replenishment model is
expected to increase significantly parts availability and machine utilization, while reducing
inventory levels from five to ten percent (see Table 7.1. below).
' Proprietary data is disguised to protect Instron's competitive information. These actual figures in Table 7.1 are for
illustrative purposes only.
80
Potential
Stock outs
Anmud
Denwid
PARTS
STD
MNbrdhl
Demand
COST
Ora
A563-110
49
1018
4
A563-118
319
289
27
A563-119
73
438
6
T563-2
319
240
T563-11
328
48
T563-60
73
T563-66
142
72
T563-282
4
COST
8244.
QCantity
1
8
27
OQ
ROP
COST (S)
4676.454
8
3549.177
4
C
ROP
5
4890.72
4
'30
8583.65
30
8
3453.69
7
4
1
3885.
8
30
7149.29
30
1
771.
8
42
1981.
31
3834.
4
7
3177.
1168.992
8
21
6
8
12
16
49
471
4
8
A581-15
494
332
41
65
T581-41
347
31
65
TO -
3816.
13
2899.73
15297.47
4
46
1581.55
32
6
1494.16
32
.192
32
7
1524.57
51
15343&672
_f Luton
Oversupplied
2897.
Inventory
Reduction
Table 7.1. Some Benefits of the Pilot Project for Instron's Machine Shop
Last but not least, the project delivered a documented frame-work for achieving similar
improvements in Instron's other product lines.
7.3.
Recommendations
The benefits of being lean are sustainable and significant in helping a company to
improve its competitive advantages. The lean supply chain approach introduced in this thesis is
a combined strategic and operational method that can help the company successfully transform
into a lean enterprise and also expand the lean status to the whole supply chain. To accelerate
the current improvement process and ensure long-term success, Instron Corporation should
definitely follow this evolutionary path. A three-point plan has been recommended as follows:
- Strengthen the current business by removing all non-value adding waste.
81
- Redefine the value proposition to provide customers with better values.
- Collaborate with customers and suppliers to optimize the entire value stream.
The recommended process is to focus on each product family and its value stream, then
eliminate activities that do not add value and streamline the remaining ones. The most crucial
issue is the notion of value and waste. In the lean approach, we need to specify value through
the eyes of customers, not from the perspective of the company, departments, or functions.
Value is truly what the end-customer is willing to pay for, whereas waste is an element of the
supply chain that adds time, effort, and cost, but no value.
The next important step is to clearly design and build a long-term strategy to provide
customers with increasingly cost-effective, hassle-free, and improved quality solutions. In the
competitive market, customers will only stay with the company that understands and better
addresses their needs.
As collaboration is the current trend in today's business, people have stopped thinking of
business deals as zero-sum games. They have started to see win-win solutions in collaboration,
"to expand the pie," as people usually say and hope in their supply chain integration. The last
point reminds the management of the synergy of early collaboration with customers and
suppliers that will accelerate the lean transforming process and optimize the whole value stream,
leading to the savings being shared among all supply chain partners.
7.4.
Conclusion
In summary, the internship project and this thesis made me realize that an isolated
improvement effort can achieve very limited effects, especially in the complex and competitive
environment of today's business world. To improve the on-time delivery performance of the
Electro-Mechanical Business Unit, Instron's management should pursue a more radical and
broader approach that can ensure the correction of a problem from its root causes and be able to
sustain the improvement for future successes. Lean supply chain management is one of the best
answers.
1Womack, James B., PowerPoint presentation "Lean Thinking for the Canadian Auto Industry: The Next Leap," in
Ontario, Canada, on 04/12/2000.
82
APPENDICES
83
A
(
The Complete LP Analysis
What were the most critical factors that have
prevented the company from achieving 95
percent of on-time delivery performance for
Electro-Mechanical products?
The periodic financial measure and management
resource limits have worsened the work
conditions and material handling issues,
eventually driving down the EM on-time delivery
performance.
Process
Inconsistencies
[Al]
Insufficient
Discipline
rB11
Insufficient
Executive
Attention
[A21
Inadequate
Work
Management's
Limits
[A
Condition
Issues
Cntis
eRl
Limited
Resources
[A3]
Financial
Policy
[C11
Materia
Handling
Issues
[D1
Financial
Drive
[C]
Inefficient
Supply
& Handling
rrliMismatched
Unleveled
Demand
rC21
Replenishment
System
Figure A.1. Simplified LP Analysis of EM Late Delivery Problem
84
[Al. EM HAS LIMITATIONS IN HANDLING ITS OPERATION ISSUES
[All.
EM HAS NOT FULLY SUCCEEDED IN IMPLEMENTING AND SUSTAINING
PROGRESSIVE MANUFACTURING PROCESSES
a) INSTRON
MANAGEMENT (LOW &
MIDDLE LEVELS) DOES
NOT HAVE ALIGNED
VISION ON
MANUFACTURING
PROCESSES
The EM pull system is working
very well as volume is way
down. However, any shift
upward in production will
magnify problems
There is a lack of proper
education in management of
kanban process
b) NEW PROCESSES ARE
USUALLY NOT
SUSTAINABLE
c)
EM IS NOT SUCCESSFUL
IN IMPLEMENTING AND
MAINTAINING DEMAND
FLOW PROCESS
Workers prefer old work
methods due to insufficient trust
or knowledge for new
manufacturing processes
Linear process is not followed
Due to time constraint, the
knowledge transfer was not
done efficiently in many
previous internship projects
We continue to batch machines,
which only extends our lead
time
Workers do batch production
because they think it works
better
[A21.
TOP MANAGEMENT HAS NOT PROVIDED SUFFICIENT NEEDED ATTENTION
AND SUPPORT FOR MANUFACTURING ISSUES
a) MANAGEMENT HAS
NOT PAID SUFFICIENT
SUPERVISION TO
IMPROVE PRODUCTION
PERFORMANCE
On time performance is
improved when management
pays attention, but it drops when
it's not the top priority
There has not been sufficient
supervisory resources to provide
needed supervision and support
to production
Supervisors do not always
notify emerging problems
early
b) MANAGEMENT HAS
NOT IMPLEMENTED AN
EFFECTIVE CONTROL
SYSTEM FOR
PRODUCTION
Instron has been lacking the
right metrics which facilitate
and anticipate when processes
go astray
Instron has been lacking
proactive measures/reports to
give early warning messages to
out-of-balance conditions
c) MANAGEMENT HAS
NOT DONE ADEQUATE
STUDIES ON LATE
DELIVERIES
Order progress or status is not
adequately tracked
There has been no historical
record on late deliveries
Tracking order status daily is
a difficult job
85
[A31. EM CANNOT HANDLE EFFECTIVELY UNPLANNED
LIMITED RESOURCES
a)
EM CURRENTLY HAS
MINIMUM WORK FORCE
THAT CAN HARDLY
DEAL EFFECTIVELY
WITH THE UNEXPECTED
SITUATION DUE TO ITS
b) EM HAS NOT PREPARED
SOME GOOD PLANS FOR
UNEXPECTED
SITUATIONS
c)
Current low employment has
caused labor constraint when
dealing with unexpected needs
Unexpected problems often
cause deviations from work
Custom designs are usually late,
which causes chain delay in
production processes
There has been capacity
constraint due to unexpected
labor shortages
Order are often changed at the
last minute, negatively impacting
delivery performance due to lack
of materials or accessories we
don't plan for
One-shots regularly run late
IT'S HARD FOR EM TO
MANAGE ONE-SHOTS
OR CUSTOM ORDERS ON
TIME
It may take 2 or 3 weeks to catch
up with I week delay due to
labor shortages
[BI. EM HAS ISSUES IN WORK CONDITIONS AND DISCIPLINE
[B1]. INSTRON HAS A SOFT HAND ON WORK DISCIPLINE
a)
INSTRON HAS LACKED
A CONSISTENCY OF
PROCESS ACROSS
BUSINESS UNITS
b) PEOPLE DON'T
ALWAYS HAVE A
CONSISTENT CONCERN
FOR GETTING THING
DONE IN A TIMELY
MANNER
c)
Planners do not always look into
parts that show both in stock and
on shortage
Stock room people do not
always draw jobs from stock
room on time
Workers tend to do things the
way they like to do because there
is no penalty for doing so
Buyers/Planners have their own
forms or ways to communicate
with suppliers
Buyers/Planners do not always
send parts out for finishing in a
timely manner
Workers can freely arrange their
work as long as they meet
deadline
Both planners and workers don't
like to change their own way of
doing things
Planners do not always complete
MRP jobs on time
86
INSTRON'S
MANAGEMENT DOES
NOT STRICTLY REQUIRE
WORKER TO FOLLOW
NEW IMPLEMENTED
PROCESSES
[B2].
a)
INSTRON HAS A LIMITATION ON WORK CONDITIONS
INSTRON HASN'T HAD
AN EFFECTIVE
INCENTIVE SYSTEM
b) INSTRON HAS BORE
RISKS USING OBSOLETE
AND INEFFICIENT
EQUIPMENT
Bonus cutoff has lowered
workers' morale and their
motivation for work
Inadequate preventive
maintenance may cause
unexpected capacity constraint at
Binghamton machine shop
There is now no incentive
system in place except overtime
The equipment that we depend
upon is old and was poorly
maintained for many years
Workers don't have enough
proper tools
It takes longer than it should to
run a test because the testing
computers are slow
[C]. TO ACHIEVE ITS PERIODIC FINANCIAL GOALS, INSTRON HAS SUFFERRED
FROM ITS SELF-CREATED UNLEVEL DEMAND FLOWS
[C1].
a)
EM HAS BEEN STRUGGLING WITH UNLEVEL DEMAND
DEMAND FLUCTUATION
CAIJSES DIFFICULTY FOR
BOTH MANUFACTURING
AND MATERIAL
HANDLING
Lack of order causes problems in
fully utilizing and allocating
production capacity
Spikes and shifts in product mix
severely affect machining capacity
within the cell
Non-linear pulls create havoc in
machining cell with define capacity
and maintenance issues
Some raw materials require long
lead times and consistent demand.
Both non-linear pulls and the build
spikes affect the availability of these
materials
87
Incoming order product mix is
different from quarterly forecasted
product mix
[C2].
a)
DEMAND FLUCTUATION
CAUSES DIFFICULTY FOR
BOTH MANIJFACTURING
AND MATERIAL HANDLING
Instron has offered large variation
of testing models to meet most of
customers' needs
We don't focus on daily output.
Our emphasis tends to be weekly,
monthly, or quarterly goals
Quarterly financial goals drive EM
management to ship as much as it
can by quarter ends
Booking is highly inflated by the
end of quarters due to sales effort to
achieve or exceed quarterly
financial goals
ID]. EM HAS BEEN STRUGGLING WITH ITS MATERIAL REPLENISHMENT
ISSUES
[D1].
a)
EM HAS HAD SERIOUS PROBLEMS IN METERIAL SUPPLYING AND HANDLING
LATE PARTS HAVE
CAUSED THE MAJORITY
OF PRODUCTION AND
SHIPMENT DELAYS
b)
UNQUALIFIED PARTS
HAVE CAUSED DELAYS
FOR PRODUCTION AND
SHIPMENT
c) EMPLOYEES DO NOT
ALWAYS HANDLE
MATERIAL ISSUES IN A
TIMELY ISSUES
Purchased parts don't come in
Material shortages due to quality
Stock room or material handler
on time
issues
does not proceed rejects in a
timely manner
Quite often a frame is ready to
Tooling Units parts get rejected
Stock room or material handler
ship, but we have to wait for an
accessory from LTD or another
supplier
regularly
does not make stock adjustment
in a timely manner
Part stock-outs delay production
and on-time shipment
Rejected parts don't get repaired
quickly enough
88
[D2].
a)
CURRENT INSTRON'S REPLENISHMENT SYSTEM DOES NOT WORK
EFFECTIVELY IN CURRENT MARKET CONDITION
CURRENT LOT SIZES
ARE NOT APPROPRIATE
FOR CURRENT DEMAND
CONDITiON
Lot sizes do not support build
plan
Improper lot sizes and reorder
points lead to stock out
conditions
b)
CURRENT
REPLENISHMENT
SYSTEM DOES NOT
INCORPORATE PART
LEAD TIMES VERY
WELL
Current reorder points do not
incorporate proper supplier lead
times
Low inventory level and long
lead time parts lead to frequent
stock outs when demand
suddenly goes up
Lot sizing needs to be reviewed
and adjusted for today's sales
forecasts
89
Low inventory level can't
support production efficiently
when there are material
problems
B
The Complete Ishikawa Analysis
MATERIALS
PROCESS
WEAK
COMMUNICATION
UNQUALIFIED
PARTS
INSUFFICIENT
COLLABORATION
W/ SUPPLIERS
UNTI AELY
-
LATE PARTS
LOW
VISIBILITY
LACK OF
CONS ISTENCY
INEFFICIENT
REPLENISHMENT
MODEL
NOT
SUSTAINABLE
LATE
onmm
-
hh11
DEI IVERIES
)F EM
PR ODUCTS
COMPLEXITY OF
"ONE SHOT"
NON PROMFG DESIGN
PRODUCT
DEVELOPMENT
NOT
DEPENDABLE
UNOPTIMIZED
UTILIZATION
EQUIPMENT
LOW
M OTIV ATION
UNOPTIMIZED
PRODUCTION
WEAK WO RK
DISCIPLI NE
WORK FORCE
Figure B.1. Simplified Fishbone Diagram
90
PROCESS
Incomplete Kanban System
Difficult to Do
Not Follow Demand Flow
Insufficient Use of
Visual Tools
Lack of
Capable Sta
.4
LOW VISI BILITY
Resource
Limits
4
--
Lack of Training &
Education
Low Priority
UNTI MELY
Lack of
Lack of Related
Knowledge
Met
Insricit
Insufficient
Supervisory
Low
Priority
No Interest
Lack of Effective
Resources
Control System
Insufficient
Motivation
Lack of
Standard System
Insufficient
Supervisory
Resources
Lack of
Related
Knowledge
Limits
Lack of
Trust
MATEF
No Effect ve Incentive
Lack of Trust
Resource
LACK OF
COsI STENCY
Workers/Employees
Resist to Change
Unaligned
Vision
/
PRODUCT DEVELOPMENT
Lack of
Related
Knowledge
Lack of
Trust
Resist to
Change
0iire
Education
Resour%
Limits
Corporate
Lack of
IALS Training
&
NO T
SUSTAINA BL
People Like to Do
Thing Their Way
V& Ed uatUon
Follow &
Maintain
*00
WORK FORCE
Figure B.2. Details of Process Analysis
91
Unable to
LATE
DELIVERIES
OF EM
PRODUCTS
1P
EQUIPMENT
Lack of Training
Buyer's Problems
MATERIALS
Price Sensitive
Select Unqualified Suppliers
Inexperienced
Insufficient Communication
TT~'~
h
II~E~~
UNQ~T
UAI~I~LIF
Tb A Tb'I'C'
TS
PA
Not Follow
Design Accurately
Design Defects
4Y
Errors & 0 mits
Improper
Handling
mits
Unqualified Sup pliers
Insufficient
Safety Stock
Dsge'
Designer's
Mistakes
Supplier's
Faults
Supplier's
Problems
Inaccurate
Data
Insufficient
Implementation o
Kanban System
Over cut
Invent ory
L ack of
Related
Kno vledge
Economic
Downturn
Lack of
Supplier
Support
Raw Materials Problems
Capacity
Constraints
Demand Change
Finance
Problems
Unexpected
Problems
ATE~
INEF FECTIVE
S
Inaccurate
P.-
MODEL
Data
Inaccurate
Lack of
Communication
Demand
Change
Inaccurate
Unauthorize
d Decision
Data
Improper
Reor der Point
DData
Demand
DaaChange
Improper Lot
Sizes
Resourc
imits
2
ARTS
Lack of
Concern
Low Priority
Unrealistic
Planning
Tas ks Are Not
Tim ely Done
PROCESS
LATE
DELIVERIES
OF EM
PRODUCTS
1PPP
PRODUCT DEVELOPMENT
EQUIPMENT
WORK FORCE
Figure B.3. Details of Materials Analysis
92
MATERIALS
MATERIALS
LATE
DE LIVERIES
OF EM
IODUCTS
PRODUCT
DEVELOPMENT
EQUIPMENT
Lack of Effective
Incentive System
Deviation
from Work
o
WLack of Recog nition
Unrealistic
Planning
Other
Bonus Cut-off
Distraction
Unplanned
Tasks
Cut Cost
LOWI
MOTIVA TION
Wait for Help
Re-engineer ing
Une xpected
UNOPTIMIZED
Pro]blems
-
People Don't
Follow Proper
Procedure & Rules
PRODUCTI ION
Untidy
Work Area
Lack of
Proper Tools
No
Penalty
Lack of
Timely
Support
4--
Sales Drop
Finance
Problems
Fob
Economic
Inse curity
Downturn
Lack of Trust
WORK DISCIPLINE IS
NOT SUF1F1'WIET'L V
Cut Cost
Thin Staff
Extended
Cycle Time
ENFORCED
Lack of
Supervisory
Demand
Fluctuation
-
,
Too Much Work
To Do
Resources
Cut Cost
WORK FORCE
Layoffs
Lack of Concern
Getting Things Done
in a Timely Manner
Minimum
Work Force
Labor
Shortage
Cut Cost
Figure B.4. Details of Work Force Analysis
93
MATERIALS
MATERIALS
LATE
DELIVERIES
PPFP_
Inadequate
Preventive
Maintenance
PRODUCT
DEVELOPMENT
OF EM
PRODUCTS
WORK FORCE
Lack of
Raw
Materials
Resource
Limits
Unexpectec Demand
Demand Fluctuation
Cut Cost
Insuffi( cient Planning
UNRELIABLE
ROTTPMNT
Old Machines
/
Lack ol In-House
M iintenance
-
Demand
Fluctuation
Spikes &
Shifts in
Product Mix
Poor
Maintenance
~'
LuppLer s Pro lems
4--Long Lead Time
UNOPTIMIZED
MvACIIJNE
UT ILIZATION
-
Capacity
Constraint
De nand
Fluctu ation
Lack of Proper
Maintenance
Unexpe cted
Down time
Cut Cost
Demand Varia tion Does
Not Match with Equipment
Defined Capacity
EQUIPMENTI
Figure B.5. Details of Equipment Analysis
94
MATERIALS
MATERIALS
111R
411k
bbb,
PORK
),
WORK FORCE
Uncerta in Long
Lead Time
EQUIPMENT
Lack of
Collaboration
No or Little Previous
Experience
Department Culture
New Learning Curve
Lack of Management
Unique Design
ack
of
Fo rum
A ttentin
4--
Economic Distraction
Unique Demand
"ONE-SHOT"
Lack of Communication
DESIGN IS
HIGHLY
COMPLICATED
4-
Functional Silos
NON PRO-
Uncertain LT
for Design
IVIANU
ArTA.I URING
k
SOLUTION
Uncertain LT for
New Custom Parts
Custom Design
Time
Pressure
Uncertain LT
for Trouble
Shooting
Low
Commonali ty
Unique
Une
Demand
Lack of Proper
Maintenance
NA nr I itthe
Unable To Do
Accurately
Planning
Un expe cted
D own time
Previous
Experience
Cut Cost
Diffi cult To
MXan ufacture
PRODUCT DEVELOPMENT
Figure B.6. Details of Product Development Analysis
95
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